Law of Business Associations - Coursework Example

? Law of Business Associations Law of Business Associations The question concerning the scope, form, and content of directors'duties is a long-standing problem in company law and corporate governance. The issue has proved to be one of the most challenging to solve. For a long time, the duties of directors have been derived from the common law, equitable principles, and legal provisions, mainly the company’s act 1985. According to Foster (2010, p.26), some scholars believe that directors play a small role in smooth running of a company. Instead, the board is responsible for their company’s success. However, this is wrong in that both the boards and the directors them self plays a significant role in company’s success. Failure for any of them to perform as expected can lead to collapse of an organization. Although company law has been in existence for a very long time, the Companies Act 2006 received Royal Consent on year 2006. This review of company law was the biggest review of United Kingdom Company raw for a period of 40 years. The review project included a three year detailed investigation by government appointed party, a detailed research on the specific issue by the law commission of England, Wales, and Scotland, and an extensive public consultation on a number of technical issues. The act contained 1,300 sections and 16 schedules. The government will issue more material as regulations made under the act. The act included a new statutory statement of the universal duties of directors in place of the common law and replaced the additional rules on directors' duties relating to fair dealing formerly found in Part X of the Companies Act 1985. The Act also introduced a new legal right for shareholders to charge their directors in the company’s name. The provisional action and duties of the director are already in force. The codified directors' duties came into effect in two faces: on 1 October 2007 and 1 October 2008. The aims of this reform were to modernize the United Kingdom company legislation where necessary, and thus make it relevant to the business condition of 21st century. The following are changes made in line with this aim: it brought the company law up-to-date by giving recognition of electronic communication for conveying legislative information. The act has enabled company auditor to negotiate liability limitation with their customer among many other. In the need to modernize united kingdom company‘s law, two key issues were considered. First, should the law expect from the company any wider social responsibility, or should they be left alone to peruse the objective of making maximum profit for its shareholders. Secondly, should any legislation be more specific about the duties of companies’ directors. The changes made between this two areas, now form the basis for how the company and the outside world expects the director to operate and account for their action. Since the act center around the duties of directors to their companies, it therefore becomes very important to have a clear understanding of who is a director. A company’s director is the person to whom the laws look upon; to run the affairs of a company on behalf of its owners (Martin S.2005). A company is required to have at least one director. Conversely, a public company must have a minimum of two. This is because companies- artificial legal persons- cannot act for themselves- they need to act through other persons. This also applies to private companies that have one or two shareholders. The company must still give at least one director even where an individual is both a shareholder and a director. In such circumstances, the law will still see a technical distinction between the interest of the shareholders company owners and the company directors as the ultimate decision makers on behalf of the company. According to the act, all limited company should have a director. Bearing in mind that a company’s director is one who regularly makes most of the decisions relating to the company, it is disappointing to find out that the act does not define the connotation ‘director’. The absence of a precise definition of the term is unhelpful in making the law accessible to the public. According to the act, what determine the accomplishment of the responsibilities allocated to every individual determines the company's trend. In most cases, different companies determine their own process of appointment, through their articles of association. Ranasinghe (2010, p.338) argues that directors need powers to act for them to carry out their duties effectively. The company act bestows some powers to the board members to transact on behalf of the company. Their powers are dependent of the company and as a regulation; they may not carry unauthorized activities on behalf of the company. Contemplation of the question of directors’ powers needs therefore to happen in the light of the powers of the company itself. One of the outcomes of the company’s law reform process was the identification of the principles of directors’ duties under the common law. The government supported this particular reform. It considered that it would improve the comprehension of the company’s law in the area: embarking on establishing law concerning director’s duties in the act would make the law easier to follow by non-specialists and thereby help lower unnecessary legal costs, particularly for small and medium companies. The provisions enclosed within the Act implied a very significant amend of company law with about two-thirds of the Companies Act 1985 repealed. By virtue of these provisions, what were formerly looked upon as common law principles, are now taken as provisions of primary legislation. The Government accepted that directors' duties are basic to company’s law, so the Act attempts to clarify what we expect of directors. In the past, the argument involving company directors' duties centered on the question of whom the directors are answerable to in the first place. In the formulation of this act, the same question is asked. Moye (2004, p.422) states that among the important directors duties identified by companies act 2006 includes, 1) The duty to act within powers: The director must exercise his powers in accordance with the granted terms. He should only exercise his power for the conferred for purposes. 2) The duty to promote the success of a company: The act requires the director to act in a way he considers would most likely endorse the success of the company. In doing so, he should bear in mind six basic factors such as the possible consequence of his decision, the interest of company employees; need to foster good company relationship with suppliers and customers, the effect of company relationship to the communities and the environment. Finally, the desires for a company to maintain its reputation, for a high standard of business conduct. The Directors must take into account all this factors in each case. There is no will to disregard any of them. However, it is not clear how one prioritize these factors in the event of a dispute. There are some uncertainties around the scope of this new duty. For example, different people could define the term success of the company differently; the act has not provided a standard definition to eliminate the controversy. The fact that it may also be easier for a shareholder, performing on the company's behalf, to sue a director, for violation of duty is a point of concern. Currently, such assertion is only viable in a scenario such as “fraud on the minority.” The Act allows one to take a derived action with regard to the director's negligence, or desertion of duty. The claims process incorporates; procedures designed to filter out baseless allegations there are fears that discontented shareholder exposes the directors to an increase in claim. There are also concerns, which portray activists as being capable of embracing this procedure as a strategic weapon against listed public company directors. Directors should also realize that, under the new Act, their power to obtain the members' approval for any violation may be truncated. Currently, there is generally no legislation inhibiting a director who is also a shareholder form voting to approve his own violation. It is important to note that, major shareholders have discretional powers to act in line with the objectives of the company. Under the new Act, it ignores the votes of the director in violation; this constraint is particularly likely to have an effect on owner-managed companies where, the board may be at the mercy of marginal shareholders to secure approval. It is evident that, the increased risks will delay decision making-management seek conformity with their duties. However, the Government has a view that the decision-making process should not significantly Change and intends to issue a non-binding direction along these lines. It holds that the call for a major change in approach is essential to fix the accruing issues affecting the company. 3) Avoiding conflict of interest: This duty is provided in section 175 of the act – a director should alleviate a scenario that may lead to conflicting personal, and company interests. For instance, it is offensive for one to be a director of two companies whose interest are incompatible or be a major shareholder. Only the shareholders and the director, whose interest are not conflicting with those of a company, can authorize the situational conflict. The act has modified the approach to conflict of interests. It is worth noting that the independent directors can be able to approve certain types of conflicts. Carrol & Lundmark (2001, P.180) explains that, Rather than having to look for endorsement from shareholders, either, specifically or through requirements in the articles association. It is still mandatory for directors to reveal any interests regarding their personal interests that march those of the company; they also have an obligation of complying with the specifications set by the company. The new conflict policies have also raised worry as far as they convey to cover potential conflicts. It is likely that this will cause particular complexity for the board of directors. A few clauses deal with minor conflicts that pose insignificant impact on the company's progress. However, revising the company article of the association is necessary, for any companies that wish to enjoy the full benefit of the new act. 4) The act also provides the directors with the duty to exercise independent judgments. According to act, a director must exercise independent judgment. The director infringe the duty while acting in harmony with an agreement entered into by the company, which restricts his judgment nor is it infringed by his acting in a way approved by the company's constitution. There is, however, some contradiction with the previous duty. The fact that the duty is not violated when a director acts in a way accepted by the company’s constitution, and the broad definitions of “constitution” (e.g. to include shareholder contribution), means that the employment of the directors’ independent judgment may now be subject to interruption form shareholders. 5) Other Duty proposed is to exercise reasonable care, skill, and diligence while exercising his duty as director. The duty t accepts benefit from third party in section 176. The section provides that directors must not accept any benefit from a third party. The duty is from the fiduciary duty for a director not to make a secret profit. This duty is a summary of the previous law and hence not necessary. The duty to declare an interest, in proposed transaction or arrangement. If a director has an interest in any company transaction, he must declare. A renowned debate by A. A. Berle and E.M. Dodd on corporate responsibility took place in USA in 1930s. Among the position set out in that debate continues, to dominate the present discussion: to whom are corporation accountable. Berle argued that all powers granted to the administrators are necessary and at all time exercisable for the benefit of the shareholder. This is sensible because the shareholders are the legal owner of the company. They enjoy the excess earning after the company has satisfied its entire obligation. In contrast, Dodd was of view that cooperation as a social institution has a social role to play other than just making a profit for shareholders. According to him, a company too had a responsibility over its stakeholders (i.e. shareholders, employee, customer, and the public). He emphasized that; it is not desirable for a corporation to give so much emphasis to one purpose of making a profit for their shareholders. One should take Emphasis to other purpose for they also tend to have an impact to the company especially in future. From the Dodd argument, it is clear that the director should look beyond profit maximization and the position of the shareholders. The position of companies other stakeholders (i.e. employee, creditor’s customers, suppliers) has to be reveal in the legal obligation of the management. This mean a company is a social mechanism and not a private property. In his analysis, Dodd referred to a legal model of a company now as prevalent to purely private company with shareholder interest being the key purpose. Dodd was for the view that that ought to change to include the interest of other stakeholders. There should be a balance in interest of the stakeholders (Thompson & Rogers, 2009, p.88). The difference between the above two theories can be illustrated by what happen in conflict between two competing interest under the respective theories. Preference is given to the shareholder according to Berle. The interests of other stakeholders were external, had no legal standing, and hence cannot establish legal claim. The debate between Berle and Dodd seemed to be largely complete in year 1932. The US cooperate law settled the debate in Dodd favor. The notion that the purpose of a modern company is to maximize shareholders value is evident to date. Comparing company act 2006 with Berle and Dodd debate it is important to investigate the various company law review group. Prepared to aid the government to prepare the company law reform bill. In view of section 170(4) the act stipulate that duties of the director to be interpreted and applied in the same way as common law. This would reduce the managerial liability to shareholders. This suggests that the director’s duties owes to an economic model of principle agent reflected in company law through equating of company interest with those of shareholders. This is somehow in line with Berle’s shareholders primacy theory. Section 172 of the act has listed six external factors to which the director should have due regard this called for close examination of Dodd’s work. The CLRSG has clearly suggested that wide responsibility such as those of the society and environment are fundamental to the success of a corporation as described by Lewis (2005, p.144). While accepting the pluralist theory, CLRSG acknowledge that its application is not foreseeable. Given the argument against, CLRSG has drafted a statement of director’s duties bearing in mind the shareholders value. However, the fact that the director should also take into account several other external factors shows a bit variation from the pure shareholders supremacy concept advocated by Berle. Conclusion Even though Dodd’s argument received government favor in 1930s, all along, Berle’s argument has been in mind of people. The company act 2006 has borrowed a lot from Berle and Dodd debate in 1930s. It has attempted to link their argument and proposed neither a non-pure popularity theory nor a shareholders supremacy theory. The introduction of the statement of general duties, as discussed, Is highly significant for it shows the way we expect the directors to act and how they account for their actions to their company as explained by Besser & Miller (2011p.516). The company act 2006 has attempted to create a mechanism to include wider stakeholders group within the duties of directors. The maximum possible impact of this statutory responsibility for directors influences the trend of various companies. Such companies have complicated business activities and a large number of shareholders. However, the change applies to all companies big or small, so it is necessary that all the directors familiarize with what stakeholders expect from them as stipulated in the act. Although the act has not entirely solved the stalemate surrounding the duties of directors, it is nonetheless significant. Question two Section 172 of the Act proposes that directors should take decisions in a way that would endorse the success of the company, for the benefit of the stakeholders as a whole. This compelled them to consider the interests of stakeholder constituencies such as creditor’s, customers, and employees. An important thing to note is, according to sections 171 of the company Act 2006, any directors who act contrary to the stipulations of the company, and without the authority of the board of directors, is deemed to have breached the company’s constitution. Bearing in mind that John acted against the approval of the C.E. O Angela he has breached the company law. The breach of section 271 (a) is a breach of directors duty and only resolution of shareholders (according to section 239 (3), (4), and (7)) can be used to approve the directors breach. The consequence of breach of this rule is that specified parties will be accountable to the company for any benefit they have made form the deal. They will also be accountable, on a joint and several bases, to compensate the company in case of any loss, or damage. Defenses against charges of liability are, if connected person is able to proof that, at the time of the entering into of the transaction he or she was unaware of the circumstances of the contravention (i.e. the fact that the member had not approved the transaction) will not be legally responsible. References Besser, T. L., & Miller, N J 2011, The Company They Keep: How Formal Associations Impact Business Social Performance. Quarterly journal of Business Ethics Jul2011, Vol. 21no. 3, pp.503-525. Carroll, W., & Lundmark, W 2001, Business associations in the common law world, LIT Verlag Munster. Foster, D 2010, Islamic Perspectives on the Law of Business Organisations I: An Overview of the Classical Sharia and a Brief Comparison of the Sharia Regimes with Western-Style Law. Journal of European Business Organization Law, Vol. 11 no. 1, pp.3-34. Lewis, W 2005, Restatement of the law of business associations: preliminary draft, American Law Institute. Moye, J. E 2004, The law of business organizations, 6th edn, Cengage Learning: New York. Ranasinghe, P 2010, Ambivalence towards law: Business Improvement Associations, public disorder and legal consciousness. International Journal of Law in Context, Vol. 6 no. 4, pp.323-342. Thompson, R., & Rogers, C 2009, Corporations and other business associations: selected statutes, rules, and forms, Aspen Publishers/Wolters Kluwer Law & Business. Read More