<\/p>\n
1. Directors have unfettered power in the running of a private limited company and have no responsibility to the shareholders in regard to the decisions that they make. Discuss and form a view on this comment in the context of the overall framework by which companies exist and operate in England and Wales<\/strong><\/p>\n In 1985, Kenneth Lay, using proceeds from junk bonds, combined his company, Houston Natural Gas, with another natural-gas pipeline to form Enron. From the get-go, the company worked to move beyond just transporting and selling gas. It decided to become a big player in the newly deregulated energy markets by trading in futures contract. In the same way that traders buy and sell soybean and orange juice futures, Enron began to buy and sell electricity and gas futures.<\/p>\n In the early 1990s Lay employed a consultant with a firm called Mckinsey & Co to create a new division of Enron that was to be called Enron Finance Corp. This consultant was Jeffrey Skilling.<\/p>\n With Skilling’s foresight, Enron’s economic interests grew into different directions creating new markets as it went along. The trading entity of Enron invested several billion US dollars on trading in futures; the downside was that Enron was not earning anything from those billions. The lack of return went largely unreported until December 2001, when the Company announced it was entering into Chapter 11 Bankruptcy.<\/p>\n Commentators have noted that one of the major failings of Enron was within the partnerships that it created for many of its trading operations. Through its chief financial officer Andrew Fastow, Enron created new entities whose debts were kept apart from Enron’s own book debts.<\/p>\n However, the bubble burst and in October 2001, the firm’s auditors, Arthur Anderson LLP, announced that some of those partnership debts should have been included within Enron’s own financial statements.<\/p>\n The Enron saga became more intriguing as the days passed by. Probable criminal activity took place on many levels within the corporation. Within the last chapter of the story, it was reported that massive numbers of accounting documents were destroyed from October 2001 into 2002.<\/p>\n The question is as to how Enron’s executives played a shell game with investments and offshore accounts to hide from stockbrokers and holders the financial disaster looming.<\/p>\n Furthermore, how could Enron hide its failings for so long? The question is one of a Corporate Governance matter.<\/p>\n There are many working definitions of Corporate Governance. The main has been triumphed as:<\/p>\n the system by which business corporations are directed and controlled….it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance are met<\/em><\/p>\n However, the OECD definition is not the only working definition of Corporate Governance:<\/p>\n can be defined narrowly as the relationship of a company to its shareholders<\/em><\/p>\n The Nobel Laureate, Milton Friedman, noted that Corporate Governance is to conduct the business in accordance with owner or shareholder desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.<\/p>\n It is argued that the main obstacle of corporate governance is in striking a balance between power and accountability. It is important to allow managers and others in the corporation to have the power to carry out their duties to the best of their ability. However, there needs to be enough accountability to ensure that those tasks are performed for the benefit of the owners of the corporation and society in the long term.<\/p>\n However, As is often The general act This statement There, Directors are employed and empowered by the company to act in the interests of It has been While ultimately 2. Advise the directors whether they can proceed with the transaction as Directors of a The general act It has been seen The case of Slade LJ provided that:<\/p>\n If in the Ultimately a The Courts have It is an inflexible rule of a court of equity that a person in a Lord Upjohn n further enforced the provisions of non-profiting in the The rule applicable to the subject has been treated at the bar as if it In the circumstances, it can be argued that the directors of Clausen A director of a company ought not to be using his position to, in effect The Company may then ratify the profit that the director has made by There is a further duty imposed on the directors of the Company. Statute In any event, the members of the company can only ratify any action taken Even though the directors of the Company have general control with over Fraud on the minority shareholder, being Rupert, would be occurring if This is potentially a fraudulent act, in that the directors of the It would not be necessary for Rupert to prove anything more than the The directors would be poorly advised to enter into the contract with Ultimately if the Court finds in favour that the minority member, Rupert, 3. The three directors want advice on In accordance with the articles of the Company, in that the Company is A general meeting has power to remove directors provided proper notice as A member of the Company may by giving special notice The directors can avoid such situations by entering into shareholder The Bushel family owned 100 shares within the family business which had an Mr Faith’s conduct as a director resulted in the placing on the agenda at Mr Faith’s sister applied to the Court to have the resolution declared as At first instance, Mrs Faith succeeded. However, upon appeal to the The rationale behind such a decision was that it is down to the Company to If the directors of the Company are seeking to ensure their offices or In order to be able to amend the articles of association, being the main With Martin Stock., James Smith and Khurram Hussain having over 75% of <\/p>\n","protected":false},"excerpt":{"rendered":" …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[40],"tags":[85],"class_list":["post-2535","post","type-post","status-publish","format-standard","hentry","category-free-law-essayscompany-law","tag-uk-law"],"yoast_head":"\n
\nCorporate Governance is a topic recently conceived, as yet ill defined and
\nconsequently blurred at the edges. It has been argued that one of the main
\nobstacles in striking a balance is between power and accountability. It is
\nimportant to allow managers within the corporation to carry out their duties to
\nthe best of their ability without imposing any unreasonable sanctions upon them
\nthat dilute their control. Conversely it is important to ensure that managers
\ndo not hide or deceive shareholders from the true picture of the company and
\nfor managers to have the best interests of the shareholders to heart.<\/p>\n
\nfound in many constitutions of companies incorporated in England and Wales, the
\nmanagement of the company are often given unfettered control of the company.
\nIt is therefore, often difficult, without an overwhelming majority of the
\nmembers of the company, to alter the constitution to limit the directors
\npowers. The duties of the directors of a company are quite strict.<\/p>\n
\nstatement of duty was given by the Master of the Rolls Lord Greene in that the
\ndirectors of a company must:<\/p>\n
\nbona fide in what they consider – not what a court may consider – is in the
\ninterests of the company, and not for any collateral purpose.<\/p>\n
\nhas created a fiduciary obligation on directors to act in the best interests of
\nthe company as a whole and not for shareholders; individually or collectively.<\/p>\n
\ntherefore, exists a slight conflict between the principles of Corporate Governance
\nand that of directors’ duties; that Corporate Governance is an attempt to
\nensure that the shareholders, those that without the Company would not exist,
\nare unduly prejudiced and their investments lost and that of Directors’ duties
\nin ensuring that they act within the best interest of the Company as a separate
\nlegal entity from the shareholders.<\/p>\n
\nthe company; it needs to be noted that in an incorporated company, the directors
\nand shareholders are separate legal entities from that of the company itself;
\nthe director’s duties are not owed to the shareholders but are owed to the
\nCompany.
\nAs has been already noted, directors owe a fiduciary duty.<\/p>\n
\nshown that ‘a fiduciary is someone who has undertaken to act for or on behalf
\nof another in a particular matter in circumstances which give rise to a
\nrelationship of trust and confidence.<\/p>\n
\nshareholders have the power to expel directors from their offices; directors
\nought to be, it can be argued, ultimately acting in the best interests of the
\nCompany (as a primary concern) and then acting in the interests of the
\nshareholders. However, there is a blurring of the two main principles here;
\nthat Corporate Governance and Directors’ Duties ultimately attempt to ensure
\nthat the survival of the company is seen as paramount and that the Company grow
\nand develop.<\/p>\n
\nThe 4 shareholders of Clausen Stock Graphic Design Limited, a
\nsuccessful company specialising in the design and maintenance of web
\nsites, are Rupert Clausen, Martin Stock., James Smith and Khurram
\nHussain. Khurram, Martin and James are directors and they each hold 30% of the
\nshares in the company. Rupert is not a director; he simply holds the balance of
\nthe shares (10%). The Company is governed by Table A. The three directors have
\nbeen in negotiation with Henry’s Graphic Design Limited concerning the purchase
\nof new computer software that Henry’s have designed and manufactured. The price
\nis 40,000. Clausen Stock Graphic Design Limited do not really need this
\nsoftware as they have something similar already. However the three directors are
\nbeing privately paid a fee each of 2000 if they sign the contract. Rupert is
\naware of the possible contract and is against the matter proceeding.<\/p>\n
\nthey feel that they should be able to as they control the company.<\/p>\n
\nCompany hold powerful positions and are therefore placed under strict guidance;
\nnot by the Companies Act or the Companies constitution, but by case law itself.<\/p>\n
\nstatement of duty, as has already been noted, was given by the Master of the
\nRolls Lord Greene in that the directors of a company must:<\/p>\n
\nbona fide in what they consider – not what a court may consider – is in the
\ninterests of the company, and not for any collateral purpose.<\/p>\n
\nthat the duty owed from the director to a company is more of a relationship of
\ntrust and a fair duty of loyalty being imposed.
\nWhether a company has the power to enter into a particular transaction is one
\nof good interest; whether it is in the bona fide interest of the company as a
\nwhole to enter into such a transaction.<\/p>\n
\nRolled Steel Products (Holdings) Ltd v British Steel Corporation
\n, moreover Slade LJ, provided us with a test for whether the company ought to
\nenter into particular transactions.<\/p>\n\n
\n
\ncompany’s business?<\/li>\n
\ncircumstances the above answers cannot be answered in the affirmative, then it
\ncan be argued that the directors of the company are not acting bona fide in the
\ninterest of the company and are in breach of their implied fiduciary duties.<\/p>\nAny breach of
\nthis duty can result in Court intervention.<\/h2>\n
\ndirector of a company, or group of directors, must account to the company for
\nany profit that they make by virtue of the position that they hold as directors
\nof the company.
\nThis rule is strict and absolute in interpretation and a director will be
\nsubject to sanctions without evidence of good faith.<\/p>\n
\nmade their position clear on the issue of profiting from positions of good
\nfaith. In Bray v Ford
\nLord Herschell noted:<\/p>\n
\nfiduciary positionis not, unless otherwise expressly provided, entitled to
\nmake a profit; he is not allowed to put himself in a position where his
\ninterest and duty conflict. It does not appear to me that this rule is, as has
\nbeen said, founded upon principles and duty conflict. It does not appear to me
\nthat this rule is, as has been said, founded upon principles of morality. I
\nregard it rather as based on the consideration that, human nature being what it
\nis, there is danger, in such circumstances, of the person holding a fiduciary
\nposition being swayed by interest rather than by duty, and thus prejudicing
\nthose whom he was bound to protect. It has therefore, been deemed expedient to
\nlay down this positive rule.<\/p>\n
\ncase of Boardman v. Phipps:<\/p>\n
\nwere sufficiently enunciated by saying, that a trustee shall not be able to
\nmake a profit of his trust, but that is not stating it ought to be stated. The
\nrule really is that no one who has a duty to perform shall place himself in a
\nsituation to have his interests conflicting with that duty.<\/p>\n
\nStock Graphic Design Limited
\nare placing themselves in a position where their duty to the Company, which is
\nthe overriding duty, is potentially in conflict. Ultimately, the directors of
\nthe Company are acting as trustees; if company property is misapplied then the
\ndirectors of the Company will be answerable to the Company as trustees.<\/p>\n
\nline his own pocket.
\nHowever, if he does make any profit, he is obliged to notify the board of
\ndirectors and disclose to the company the full extent of any profit that he has
\nmade.<\/p>\n
\nordinary resolution of the members in general meeting. Failing which, the
\ndirector will have to account for the profit made to the Company.<\/p>\n
\nimposes a duty on directors of any company to declare their interests, whether
\nthey are direct or indirect interests, in a contract or a proposed contract
\nwith the company.<\/p>\n
\nby a director provided that there is no fraud on a minority shareholder. If a
\nmember feels that they are being unfairly prejudiced in that the Company or its
\nofficers are infringing on the Company’s rights, then it is possible for the
\nminority shareholder to bring a derivative action in the name of the Company
\nwhere the Company will not sue in its own name.<\/p>\n
\n70% of the voting rights, the fact that the fraud in effect is being committed
\nby those with majority power of the Company is an indication that a fraud of a
\nminority is occurring.<\/p>\n
\nthe Directors entered into the contract with Henry’s Graphic Design Limited.
\nWe are informed that the Company does not require the contract or the equipment
\nbeing provided and it appears that the directors of the Company are willing to
\nuse their shareholder voting rights to create a profit for themselves from the
\ncontract.<\/p>\n
\nCompany are exercising their powers for an improper purpose; that being to make
\na profit from a contract that is unnecessary.<\/p>\n
\nexistence of the contract and that the directors, being the remaining
\nshareholder, made a profit and attempted to ratify such profit.<\/p>\n
\nHenry’s Graphic Design Limited as they may be liable to the Company for the
\nprofits that they have made as a consequence of entering into the contract with
\nHenry’s Graphic Design Limited.<\/p>\n
\nhas suffered an unfair prejudice, then it may make an order that it feels
\nappropriate in the circumstances. Such sanctions can be either that the
\ncompany is dissolved and wound up by order of the Court or that the other
\nshareholders or the Company itself should purchase the shares of the petitioner
\nat a fair value.<\/p>\n
\nwhat procedures currently exist
\nfor their removal as directors either under Table A or by way of current
\nCompany Law legislation. They would also like advice on what steps they can
\ntake to protect their positions’ as company directors.<\/p>\n
\nusing standard Table A articles, the directors can be removed from their
\noffices by simple ordinary resolution (50%) of the members in general or
\nextraordinary meeting.<\/p>\n
\nto the object of the meeting is given, and may fill vacancies if all the
\ndirectors are removed or if the directors decline to exercise the power of
\nfilling casual vacancies.<\/p>\n
\npropose a resolution to remove a director. This can be frustrated by the
\ndirectors of the Company by not calling a general meeting of the members.
\nHowever, Rupert in this situation could request a general meeting as he is
\nholding over 5% of the voting rights, as could any of the other members.
\nFailing to fulfil such a request will result in the member requesting such a
\nmeeting being entitled to call an Extraordinary General Meeting of the members
\nand petition for the removal of a director.<\/p>\n
\nagreements or by changing the articles of the Company to incorporate a Bushel v
\nFaith
\nclause.<\/p>\n
\nissued share capital of 300 fully-paid up and issued shares of nominal value 1
\neach. The Company had adopted Table A as its articles of association but they
\nhad also adopted a special article 9. This special articles provided that, the
\nin the event of a resolution being proposed at a general meeting for the
\nremoval of a director, any shares held by that director should carry at least 3
\nvotes.<\/p>\n
\ngeneral meeting, a provision for Mr Faith’s removal as a director. At the
\ngeneral meeting, Mr Faith demanded that a poll vote was taken, invoking his
\nrights under the special article 9 in the companies articles. In invoking the
\nprovision of the article, Mr Faith’s 100 shares now carried voting rights of
\n300 votes. The resolution that had been proposed was now defeated by 300 votes
\nto 200.<\/p>\n
\npassed and has an injunction placed against Mr Faith preventing him from continuing
\nas director.<\/p>\n
\nCourt of Appeal and then to the House of Lords, their Lordships found in favour
\nof Mr Bushel.<\/p>\n
\nattach what ever voting rights it sees fit to a particular class of shares.
\nNot withstanding the now section 303 Companies Act 1985, the provisions of the
\nAct, according to their Lordships, did not prevent companies from attaching
\nspecial voting rights to certain shares for certain occasions.<\/p>\n
\nare seeking to prevent themselves from being removed from office, Martin
\nStock., James Smith and Khurram Hussain ought to seek to alter the articles of
\nassociation of the Company to incorporate such a provision on the weighting of
\ntheir shares.<\/p>\n
\nconstitution of the Company, the members of the company in general meeting or extraordinary
\ngeneral meeting must pass a special resolution (75% of those eligible to vote
\nand count to a quorum) creating such a clause.<\/p>\n
\nthe voting rights, the passing of such a resolution should not cause any
\nproblems, and the directors can ensure their offices in this manner.<\/p>\nBibliography<\/h4>\n
\n
\n
\nErnst The Legal Nature of Corporations<\/em> Batoche Books 2000<\/li>\n
\nH Farrar & B M Hannigan Farrar’s Company Law <\/em>4th<\/sup> Edn
\nButterworths<\/li>\n
\nByeong-Ho Corporate Governance<\/em> Yale University Press 1995<\/li>\n
\nprinciples of Modern Company Law<\/em> 6th<\/sup> Edn<\/li>\n
\nCorporations (1850) Butterworths<\/li>\n
\nS Company Law Fundamental Principles <\/em>2nd<\/sup> Edn Financial
\nTimes Pitman Publishing 1996<\/li>\n
\nD, Jones R & Raffo C Business Studies<\/em> Causeway Press 1995<\/li>\n
\nD Company Law for Students<\/em> 11th<\/sup> Edn Financial Times
\nPitman Publishing 1999<\/li>\n
\nal Corporate Citizenship<\/em> FT Pitman Publishing 1998<\/li>\n<\/ul>\n<\/li>\n<\/ul>\nWeb-based resources used:<\/h4>\n
\n
\n