Business Corporations and Making Profits for the Stockholders - Essay Example

Company Law Order #135643 (words 3020) Business corporations exist for the sole purpose of making profits for their stockholders". (A A Berle, "For Whom Corporate Managers Are Trustees "A corporation is an abstraction. It has no mind of it's own any more than it has a body of its own; its active and directive will must consequently be sought in the person or somebody who for some purposes may be called an agent, but who is really the directing mind and will as the corporation, the very ego and centre of the personality of the corporation1" The main objective of any business corporation is to make profit for both shareholders and stock holders of the company. Therefore managers are trustees of the organization in the sense that they carry out business on behalf of the owners of the company. In this case a company cannot act in its own person. It acts through directors as principal and agent. The directors being a brain of the company, they occupy pivotal position in the structure of the company. They are the mainspring of the company. Speaking about the importance of directors, Neville J. observed in Bath v. Standard Land Co. (1910) 2 chapter 408 that "Board of directors are the brain and the only brain of the company which is the body, and the company can and does act only through them". It is only "When the brain functions that the corporation is said to function2". ____________________ 1. Company Law, N.V. Paranjape, Pg 215 2. Mercantile Law, N.D. Kapoor, Page 536 In light of trusteeship, managers are trustees in the sense that they are treated as trustees:- i. Of the company's money and property. ii. Of the powers entrusted to them. 1. Directors are trustees of the company's money and property They (Directors) must account for all the company's money and property over which they exercise control. They have to refund to the company any of its money or property which they have improperly paid away or transferred. However, directors are not trustees in the real sense of the word because they are not vested with the ownership of the company's property. It is only as regards some of their obligations to the company and certain powers that they are regarded as trustees of the company. 2 Directors are trustees of the powers entrusted to them. They (directors) exercise their powers honestly and in the interest of the company and the shareholders and not in their own interest. Alexander v. Automatic Telephone Co. (1900). The directors of a company paid up nothing on their own shares. They however, made all the other shareholders pay 39.6d on each share. They did a breach of trust, and the directors were bound to pay to the company 35.6d on each of their shares. In Piercy v .S Mills & Co. Ltd (1920). The directors of the company had the power to issue the uninsured shares of the company. The company was in no need of further capital but the directors made a fresh issue to themselves and their supporters with a view to maintain control of the company. Held the allotment was invalid and void. In Peraval V. Wright, (1902). The directors of a company bought shares from a shareholder, while they were negotiating for the sale of the company to another of a very high price and they did not disclose this fact to the shareholder. The shareholder sued to have the sale set a side. Held the sale was binding as the directors were under no obligation to disclose negotiations to the shareholder. The law imposes these directors' duties upon them so that they are not allowed to "capitalise their strategic position in the company to serve their own interest 3". The Australian Uniform companies act has incorporated statutory provisions containing an explicit reference to the judiciary obligation of directors towards their companies. Section 24 of the Australian Companies Act states: i. A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. ii. An officer (including a director) shall not make use of information acquired by virtue of his position as an officer (director) to gain directly or indirectly any improper advantage for himself or to cause detriment to the company. However the English law of companies does not include this judiciary relationship. Instead it has a general statement of the basic principles underlying this (judiciary) _________________________ 3. Mercantile Law, N.D.Kapoor, Pg 540 relationship was preferred in interest of directors and other concerned with company management. The directors being trustees of the company, they should act in good faith and with honesty in discharge of their duties. He or they should not exploit their positions for personal gains. In Cook v. Deeks, the directors of a company diverted a contract opportunity for their own benefit since they held 3/4th majority votes they resolved that the company had no interest in the contract. Their Lordships held that the benefits of the contract in equity belonged to the company and the directors had usurped their voting power for their personal gains. In yet another case Bur land v. Earle, a director was instructed to purchase some property for the company; he first purchased the same for himself and then sold it to the company at a profit. The lower court held him liable to account for the profit so made which in equity belonged to the company. But the judicial committee of the Privy Council set a side the decision of the lower court and observed "there is no evidence whatever of any mandate to the director to purchase on behalf of the company or that he was in any sense a trustee for the company for a purchase of the property". Therefore he had legally acquired the property which later sold to the company hence he committed no breach of trust. A director is liable to account to the company for any unauthorized profits made by him by virtue of his office. A director cannot escape from his duty to account for his profit by resigning from his office of director in order to obtain a profit thereafter. Thus where a managing director was unsuccessful in obtaining a profitable government contract from the Gas Board for the company but the gas board intimated that it was willing to give the contract to managing director personally. He then resigned from his office on health grounds and latter took on the contract on his own account. He was held accountable to the company for his profit. The corrections of this decision is however, doubted in as much as no loss was caused to the company because even otherwise the party was not inclined to give contract to the company. Therefore if the director whom the contract of work was being offered by the gas board resigned and accepted by the gas board resigned and accepted the work he committed no breach of fiduciary duty. A party from the judicial pronouncements seeking to regulate the fiduciary obligations of directors' vis--vis the company there are a number of statutory provisions in company law to ensure that directors do not misuse their positions as trustees. DIRECTORS ARE UNDER LEGAL OBLIGATIONS TO CONSIDER INTERESTS OF SHAREHOLDERS AS WELL AS OTHER PERSONS (STAKEHOLDERS) I.E EMPLOYERS, CREDITORS, CONSUMERS AND WIDER COMMUNITY. (A.) INTERESTS OF SHAREHOLDERS. Directors have a legal obligation to consider the interests of shareholders as well as other persons like stakeholders. Shareholders are the owners of a company and they appoint the directors as their trustees. In this case the directors should take or have a legal obligation to consider their interests. The directors are expected to perform their functions with reasonable care and attentions. They should discharge their duties and obligations with skill and diligence as expected from a reasonable person of his knowledge and experience. They are however, not liable for bonafide error of judgment as observed by Romer J. In Re City Equitable Fire Insurance Company, a company collapsed due to bad debts and misappropriation caused by fraudulent acts as a direction. The company suffered loss and misappropriation caused by fraudulent acts of a director. The company suffered a loss to the tune of 1,200, 000 pounds and eventually was ordered to be would up. The director was convicted for his fraud and negligence. He was however acquitted in appeal because of an exception clause in the articles to hold directions of shareholders of heart by maintaining and ensuring proper management of the organizations. They (directors) are trustees of shareholders and therefore it is their duty to ensure that the company is well managed. Failure to do so, they will be held responsible for their acts. They (directors) must exercise due diligence in ensuring the company has efficiently. However the company where a director has acted honestly reasonably and in good faith having regard to all circumstances he shall not be liable. In M.O. Varghese v. Thomas Stephen & Co Ltd. The director was not held liable for non disclosure of the fact that his joint family already had a contract with the company because the said contract was entered into by the deceased father about eighteen years ago and he knew nothing about it. (B). INTERESTS OF DIRETORS TO STAKEHOLDERS (a) DIRECTORS SHOULD CONSIDER INTEREST OF THE EMPLOYEES. The Directors of a company have a legal obligation to take into consideration interests of employees. A company is made up of employees; therefore their interests should be kept in mind. By so doing Directors have a duty to ensure that employees are:- a) Motivated: This involves paying them well their salaries and in good time. The employees should also be rewarded for their good work they do. Rewards should be in proportion of the work they do. b) Provide conducive working environment: - Directors should ensure that there is a good working environment for the employees. This will motivate them so that it can enhance high yields. Employees should be given annual leave; their place of work should also be clean so that they are able to work in a healthy environment. Further, women should be given maternity leave and leave allowances. By doing this the company shall have enhanced proper working conditions. c) Training employers: Employees of a company should be trained so that they can be able to achieve their set goals r objectives. This should be done through training mend analysis. The training should be afforded or given to all those employees who are in need of training and it should be done impartially. d) Developing Employees: After the training has been done, the trained employees should be developed. There should be promoted and their salaries increased. e) Incentives: Providing for incentives is another way in which directors can show that they have interests of employees. Providing for these incentives will raise their morale in working. f) Health and safety: Health and safety at the place of work is important. The environment in which the employees are working should be healthy and safety precaution put in place. (b) DIRECTORS SHOLD CONSIDER INTEREST OF THE INTEREST OF CREDITORS: Creditors make a significant contribution to the company. Therefore the Directors are under legal obligations to consider their interests. Those creditors give goods or services in credit. Therefore the directors should ensure that the directors' creditors' interest are taken into consideration by:- a) Paying them in time: The Directors should be paid in good time. This will ensure Constant supply of goods or services to the company. b) Holding creditor's workshops: This will enhance or make them to feel part of the organization. It will also give them chance to express their views as well as management to also express their views. (c) DIRECTORS SHOULD CONSIDER INTEREST OF THE INTERESTS OF CONSUMERS Consumers play an integral party in the organization or company. Those are the people who provide ready market for the products of the organization. Without them the company will not continue to be in existence. In other words they provide a ready market for the company's products or services. In this regard, the directors are under a legal obligation to consider the interests of these consumers. This can be done by:- a) Ensuring that there is a standard or quality supply of goods:- the directors should ensure that there is a steady supply of goods and services to consumers. This will enhance their satisfaction by them not going for substitutes in the market due to a shortage supply of these goods and services. b) Steady supply of goods: There should be a steady supply of goods and services. The shortage of these goods and services will make the consumers to opt for available substitutes in the marketing impacting business of the company. b) Efficient delivery of goods and services: The directors have the responsibility of ensuring that the goods and services are delivered efficiently and in good time. They should not be delayed for any other reason and incase of any delay, the consumers should be notified in advance so that they are prepared to curb with the delay. c) Creating awareness in terms of a new products or services: The Company has an obligation to notify the consumers about the change or introduction of new products or services. This will make the consumers to adjust for any change of the services or goods and adapt to the new changes. d.. DIRECTORS SHOLD CONSIDER INTEREST OF THE INTERESTS OF WIDER COMMUNITY The wider community includes both consumers and other members of the society or community who deal or do not deal directly with the company. In any organization the interests of wider community has to be taken into consideration so that they can create easy environment for the organization to run. In return the company has a legal obligation to consider the interests of this wider community. Therefore the directors should ensure that:- a) There is contribution from the company to the community i.e. giving Educational support to the bright students from the society. This will boast the morale of people in the community to have a good perspective of the company. b) Ensuring proper sanitation: The Company has the obligation of ensuring that the environment within which they operate is kept safe and clean for human inhabitation. This can be done by carrying out regular sanitation programmes and encouraging the public to join so as to ensure cleanliness of the environment. c) Support to the community - based development organizations: The directors of the company can extend some of its proceeds to support development organizations in the society. d) Further directors have the legal obligation of not causing disturbance top the community. This disturbance can be in the kind of too much noise which disturbs the peace of the people of having anything to their possession in the sense that if it escapes it is likely to cause harm to the society. It's the company's responsibility to ensure that the environment within which they operate is peaceful. e) Provide employment opportunities to the members of the society: The directors should ensure that the community within which they are based or situated is afforded good employment vacancies. This will make the organization to feel part of the organization and support it in its daily activities. For any organization to succeed fully, it needs the support of the community within which these are based. In light of the above we can conclude that directors have a legal obligation to consider both the interests to the shareholders and stakeholders. The directors take or play a major role in the management of the organization in which they act as trustees. Therefore they do not only serve as trustees of the shareholders but also other stake holders on whose interests they are legally bound to consider in the sense that they form part of the company. Their contribution to the company cannot be ignored nor can it be under estimated. They directly contribute to the success of the company. We can therefore conclude by summing up that directors are corporate trustees in certain respects which include:- i) Trustees of the company's money which comes to their hand or which is actually in their control. ii) They are trustees of their company as regards the financial power, when they are authorized to exercise on company's behalf. Thus powers of allotment of shares, making calls, accepting payment calls in advance, allowing or rejecting transfer of shares, forfeiture or surrender of shares etc are powers in trust. Therefore in all such matters the directors must act honesty and in good faith in the interest of the company and not personal interest. Viscount Bacon in Skye's case observed "It is plain duty of the directors, who are trustees for the company, to deal with the matters of the business with which the company is concerned for the benefit of the company and not with regard to their own particular interest 3" iii) Being a trustee of the company, the director is precluded from allowing his personal interests to clash with the interests of the company. Romilly M. R. in York and North Midland Railway v. Hudson held that the directors are persons selected to manage the affairs of the company for the benefit of the shareholders. "It is an office of trust which, if they undertake, it is their duty to perform fully and entirely. It should be noted that directors are trustees of the company, and not individual shareholders. In Percival v. Wright, negotiations of the sale of the company's undertaking were in progress and without disclosing this, directors purchased shares from the Plaintiff claimed that the non-disclosure was a breach of the fiduciary duty. The court through Susinfen Eady J. ruled that directors were not bound to disclose about possible sale of company's undertaking to individual shareholder. ___________________ 4. Company N.V. Paranjape, Pg 218 References 1. Bath v. standard Land co. (1910) 2. Alexander v. Automatic telephone co (1900) 3. Piercy v. S mills co. Ltd (1920) 4. Percival v.Wright (1902) 5. Australian Companies Act 6. Cook v. Deeks 7. Berland v.Earle 8. Privy council decision 9. M.O.Vaghese v.Thomas Stephen & co.Ltd 10. Viscount Bacon v. Sykes. BIBLIOGRAPHY 1. Company Law, D. Keenan, second Edition, 2001, Oxford University press London. Read More