Analysis of a Company Act 2006: Sections 170-177 - Essay Example

? Company Act 2006; Sections 170-177 Introduction In UK, Company Law regulates the corporations formed under Companies Act of 2006. It concerns the development and changes in history of companies, with its predecessors being English and Roman laws. In its current form, Company law dates back to mid-19th Century though other business associations developed long before. United Kingdom became the first country to draft the modern corporation statutes through simple procedures and centralized for of management. The UK company law allows for freedom of designing the internal rules of the company under conditions that the minimum investors’ rights be maintained. Company law comprises of two main fields; corporate governance and corporate finance. The corporate1 governance mediates the duties and rights of stakeholders, employees, directors and creditors. Corporate governance assigns power to the company organs while corporate finance distinctively deals with computable monetary value within the company. Company law umpires rights and duties of the board of directors and general meeting, and sets out the obligatory floor for rights of company investors. It deals with the power of board representatives towards company management, liability and the exercise of power within the company. Companies acts as legal persons though their existence can cease, and therefore, insolvency section of the law adjudicates the creditors’ rights after the company fails in debts payment. Board of directors habitually manages the business on the basis of company constitution that enhances accountability for the directors. The law allows for stakeholders’ rights. The reform process enhanced consolidation of fragmented state of the company legislation in UK and promoted modernization of the Act to enhance its relevance for the business conditions. The act modified various areas; including streamlining the legal rules involved in administration of private companies, as well as empowering the shareholders to intervene in governance2 of their companies. All companies must have director(s) to enhance acting of their artificial legal entities. The directors manage the company’s affairs on behalf of the shareholders. The law stipulates the distinction between shareholder and director. Shareholder owns the company while makes the decision for the company. Company Act 2006 The UK government passed a new piece of the company legislation to benefit to companies through simplifying the company law. The formulation of the act aimed at cutting administrative burden for the companies. The act contains 47 parts, divided into 1,300 sections and followed by sixteen schedules. The legislation brought about the company law from the foundations of 19th century, with parliament taking the opportunity of codifying the duties of directors in their amendment of equitable principles and common law.2 The introduction of codified statutory statement for the directors’ duties forms the most controversial and significant sections of Company Act 2006. It replaced the previous equitable rules and common laws mixture. Most of the duties came into the effectiveness in October, 2007, and gave provisions on the conflict of interests regarding the roles of the directors. Since then, significant discussions on new codified duties were held. This led to more confusion on the directors to the extent through which they arranged their considerations and procedures when formulating decisions in a company. Concern over the new provisions leading to greater action of shareholders against the directors still holds. Notably, directors also possess other statutory duties like preparing the accounts. Before October 2007, the duties of directors3 in a company comprised of duty to exercise based on skill and care, as well as acting in good faith for the accomplishment of company’s interests. By nature, such duties were fiduciary and any breach could be ratified through shareholders’ general meeting on condition that it caused no fraud on minority shareholders. Such codified duties of the directors include: Section 171 stipulated the duty of acting within their capacity as conferred by the constitution of the company and to exercise their powers only for the purposes conferred Section 172 outlined the duty of acting in way with most likelihood of promoting the company’s success Section 173 outlined the power to exercise independent judgment Section 174 codifies the duty to exercise the reasonable diligence, care and skill Section 175 referred to duty of preventing conflicts of interests Section 176 outlines duty of not accepting benefits from the third parties Section 177 outlines the duty of declaration of interest in proposed arrangements and transactions. The duties outlined above appear similar to the duties that existed previously. Acting to Act in 2006, section 170(3) outlines that general duties depend on certain common law, equitable principles and rules, and affects the principles and rules regarding the directors’ duties. The section 170(4) states the interpretation of the general duties and application similarly as equitable principles and common law. Further regard to corresponding equitable principles and common law enhances interpretation and application of the general duties. This indicates partial codification with interpretation and the application being subject to these cases that form pre-existing principles and rules. This increased criticism of duties outlined in 2006 being unclear as previously. The added codification increased complexity of the situation as their addition happened4 at the top of equitable principles and common law rules. Section 170(3) clearly outlines the ownership of the duties directly to the company instead of shareholders. Discussion Protection of stakeholders’ interests The 2006 review of company law enlightened the shareholder approach, with shareholder taking the priority. Acknowledgement of shareholders’ interests motivates investors and directors towards maximizing profits in an economy. Potentially, company’s success depends on the relationship between the stakeholders and directors. Directors take the initiative of acting in the best interests of the stakeholders. The duties of directors, as outlined in the act, should be stated in a statutory form so that it reflects the enlightened shareholder model as well as the best practice. This takes care of both the shareholders profitability and interests. In such instances, time horizons during decision making improves, and directors guided words take a more enlightened approach towards the third parties, like suppliers and employees. All companies must acknowledge the legitimate interest of shareholders and stakeholders towards accomplishment of the CSR obligations. The shareholders, through the directors, evaluate 5the performance of the company. Directors must comply with the statutory obligations and should not spend disproportionate time and money for CSR obligations. The appointment of directors ensures accomplishment of stakeholders’ expectations. The act addresses the communication between directors and stakeholders, and maintains the primary duty of directors in acting within the shareholders’ interests. The fulfilment of such duties considers the interest of employees and customer. The act empowers the shareholders and other stakeholders in evaluating the general duties of the directors so as to enable them improve their situation. The act entitles directors to take into account the stakeholders’ interests in their duty to promote the company’s success. Enlightened shareholders’ value The duty of promoting the company’s success by directors is outlined in section 172. According to this section, the directors must act in a way considered, in good faith, as the most likely way towards the promotion of the company’s success for the benefit of the entire company. The fulfilment of their duty, directors must regard various matters like the likely long-term effects of decisions made to the interests of the company. The act reflects the need for fostering the business relationships, as well as the impacts of the operations on the environment and community. The act encompasses the concept of enlightened shareholder value (ESV). The ESV requires the directors to act within the collective best interests of their shareholders through the inclusive approach which values the establishment of long-term relationships. This rejects the notion on the exclusive consideration of the short-term financial benefits. ESV approach recognizes the cultural way through which companies conduct businesses in order to achieve generation of wealth and competitiveness for the benefit of the company at large. Previously the law outlined the aspirations of the people working in a company. However, the new law pursues the shareholders’ interests, as well as embracing the complementary purposes and wider responsibilities. The ESV assumes that the companies whose directors regard the environmental6 or social impacts have a high likelihood of performing better than those that do not. This might be the case for most companies with high brand sensitivity, whose profitability and reputation depend on publicity in relation to human rights or environmental abuse. The passage of the company bill in parliament involved consideration of the idea of changing the duties of directors from the sole ownership of the company to a broader area of duty where they acted within the interests of the stakeholders, and this entailed the pluralistic business approach to directors’ duties. This meant that stakeholders, who previously suffered from decisions from the directors, could embrace the right to remedy. Corporate Responsibility Coalition (CORE) coordinated a campaign towards support of the view. Nevertheless, government and significant business lobby rejected the view with claims of impracticality of view since it required determination of appropriate balance of interests by the court. The directors owe their duty to the company which supersedes all shareholders and members. Duty to act in their powers Directors manage the company and the act empowers them towards execution of their managerial duties.7 Nevertheless, their duties must be in accordance to the constitution of the company and in interest of the company. For instance, power of issuing new shares should raise the business capital. Duty of promotion of company’s success The act in 2006 re-casted the old law that imposed a duty of the director acting in good faith for the best interests of the entire company. The new act outlines that directors should act in if they consider in ‘good faith’ as having a high likelihood of promoting the company’s success. In fulfilment of their duties, directors must regard the responsible business behaviour outlined in the law. The company’s success remains paramount concern for the directors, with the legislation prompting them to think and remain subsidiary to over-arching director requirement. Duty to exercise the independent judgment The director must act within the best interests of the entire company instead of representing the interests of few investors or shareholders. This is applicable irrespective of circumstances through which the stakeholder is appointed. The directors must not fetter their discretion by giving away the decision making roles. This allows them to sign agreement committing the company to any course of action as well as acting in their authority. However, directors cannot delegate powers without the ability of taking them back. Duty of exercise to diligence, skill and reasonable care The act outlines the requirement of director acting in diligence, skill and reasonable care in performing their tasks. Directorship requires reasonable input of objective standard and subjective standard. In objective standard, director should act in skill, knowledge and experience reasonably expected, while the subjective standard entails director performing the duties based on skills, knowledge experience that they have. This demands for a high basic level of experience for all the board members as well as expectations of the higher standards for those with special experience or skills. Duties on conflicts of interest The obligations of directors should not clash with the other interests in their duties to the company and 8to other stakeholders. This expresses the transparency in their relationships dealings based on statutory duties. The director should avoid situations of direct and indirect conflicts, which may conflict with the company’s interests. The act covers an interest of commercial opportunity exploited also by the company; the director must not pursue it due to high likelihood of raising conflict. The director should not sit in two boards with conflicting duties. When the situation cannot be reasonably regarded to course conflict, the director should indirectly ignore it or must decide whether to authorize to the rest of board members or not. Disclosing of transactional conflict The director and company must avoid conflicting interests and must follow on the restrictions when entering into the contract. When entering into the contract, directors should disclose their interests in the contract before signing it. The disclosure should be frank and full to enable the board be aware of the extent and nature of the interest of the directors before approving the contract. Checking of the company’s articles guides in stipulating the voting for the contribution of director towards the matter, or indicate the need for shareholders’ approval. The director may declare an interest in the proposed contract at the board meeting, either orally or in written form, and sent to every director before the meeting. The director may give general notice in case of interest continuity as having an interest in any arrangement or transaction entered into with the company. Updating of declaration results in case of inaccuracies. However, some 9exceptions for exemption of declaration include lack of awareness of own interest by the director, unawareness in arrangement or transaction with the company, when the interest cannot be regarded reasonably as leading to conflict, when the board members know about the interests of the directors, and when the interest arises during the term of service of the contract. Failure of declaring an interest in the existing contract calls for punishment and acts as a criminal offence. The shareholder must approve whenever the contract an asset above the set value. Acceptance of benefits from the third parties The director must not take bribe from the third party, such as a supplier. According to the company act, the director must not accept any benefit offered in recognition to the position held. Any large tender should be free of any gift or hospitality from the potential bidders. The director must not show any sign of company suffering from harm. However, the director may accept the benefit on condition that the resulting perception may not give rise to conflicts, and this proves to be quite challenging. The reception of the gift must be based on company’s policies and should set a good standard. Benefits of the act The act necessitated shareholders’ determination of the returns expected for the company shares owned. The act also outlined the powers of directors, execution of their duties and protection. The act entitles the directors power of managing the company business, and this means that directors must run the business bearing in mind the past, present and future interests of shareholders. According to the Act, share10holders may still reign on the powers of directors based on the shareholders to direct the director on how to refrain from or take an action through special resolution. This results since shareholders own the stocks of the company and they appoint directors to run the daily affairs, and hence the mentioning of directors running the business with the best shareholders’ influence in mind. Normally, different parties vests for the company ownership, and they owners may feel superior that they can control the company based on their interests. However, according to the act, running of the company depends on the decisions made by the directors. Shareholders have the right of influencing decision making powers of directors, which is only achievable through special resolution. Passing of any special resolution shareholders must have over 75 percent majority. However, removal of company’s directors cannot be forced through written resolution. The introduction of section 174 answers questions of whether the codification of directors’ duties increased the burden on directors with regard to duty of care. Codification possesses desirable certainty effect, though it can be moot change since common law offered more flexibility to directors and courts. By courts taking in the act, the directors take in higher duty of care due to availability of positive obligation and ramifications upon failure of 11performing the duties. Despite the codification of case law, the cases still remain important when interpreting the provision on the statutes since the new law reflects the development of case law. The nature of laid down rules remain generic, and its application can be upon wide groups of people, including the retired directors and shadow directors. The statutes give confirmation for the common law position and give effect to the cases relative to statutory interpretation of equitable principles and rules regarding the roles of the directors. In conclusion, the introduction of the Company Act 2006 is significant in outlining the expectation of the behaviour of directors and the accountability for the company's success. I believe that these remedies and sanctions are sufficient since the cat introduces the new rights for shareholders to enable them work together and take actions for the alleged breach in their duties. This empowers the courts in approaching such actions by evaluating whether directors live-up to their duties in order to promote the company’s success as outlined in section 172. Also, the act enables assessment of the actions of directors. The codification of common law may or may not facilitate the operation of directors based on the law. References List Aboulian, L., & Julia, M. (2008). 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