This is part II of a series of blog posts looking at the corporate objective and practical steps that could be taken to further either shareholder primacy or stakeholderism.

Go to: Introduction -> Part II -> Part III -> Conclusion

“[t]he UK offers what is arguably the most shareholder-centered corporate law of any of our core jurisdictions” [Paul Davies & Klaus Hopt]1

As we shall see, shareholders in the UK possess considerable powers, and clearly are at the center of the corporate objective, especially when compared to the US2. How may they be further empowered and see this position preserved?

A. Preserving the market for corporate control

The UK takeover regime3 is a unique construction which grants considerable discretion to shareholders to decide the outcome of hostile bids, thus reinforcing their power in the governance equation4. These regulations, which are enforced by a self-regulatory body of market actors, will, for example, prevent the target board from taking frustrating actions without shareholder approval5.

Recent changes to the Takeover Code, have introduced new obstacles to non-recommended bids, namely in the form of the tighter ‘put-up or shut-up’ provisions, as well as enhanced provisions on public disclosure6. If these changes, as has been suggested7, are shown to shift the balance of power too far away from shareholders towards the directors of the target board, a repeal would be advisable to preserve this valuable disciplinary mechanism8.

B. Decision rights

Besides the acceptance of hostile takeovers, shareholders also have considerable powers to control management through their decision rights9. Directors’ removal is one such power, requiring only 5% of shareholders to call a meeting to decide the status of a director by a majority vote10. The power of unilateral amendment of the company’s constitution by special resolution11, as well as the power to ‘direct the directors’ to “take, or refrain from taking, specified action”12, their power of ratification13, and the requirement of their ascent to adjustments of the capital structure14, also further underline the stronghold shareholders enjoy over management15.

As Paul Davies has observed, these strong powers serve as a powerful inducement to directors to follow shareholders’ wishes16, and, as such, I do not propose to change these.

C. Reinforcing the legal duties of the directors

Salomon ((Salomon v Salomon Ltd [1897] A.C. 22))  makes it clear that at law the company is a separate legal entity from shareholders, and directors should, thereby, pursue the company’s interest as their objective17. However, this concept, influenced by the preponderance of shareholder capitalism, has ostensibly been equated to representing the financial concerns of shareholders above all others18. This is best seen in Greenlagh19, where Evershed M.R. said “‘the company as a whole’… means the [shareholders] as a general body”20.

Whilst director’s core duties are towards the company itself21, s.17222 does give an express statutory footing to shareholder primacy (the other non-exhaustive considerations listed being only relevant insofar as they impact shareholders’ interests23. I would agree with Hannigan, that the scope of these duties is generally appropriate24, although the subjective nature of the “good faith” test25 and the absence of even a basic reasonableness test are to be regretted26. Raising this standard would have the welcome effect of reducing directors’ “unpoliced discretion”27.

Giving teeth to ultra vires

One particular duty which has been neutered is the duty to act within the company’s constitution28. Originally formulated in Ashbury29, this duty provided shareholders with quasi-managerial power to control directors by rendering void any transaction by the company which was beyond the scope of its objects, or voidable in the case of acts by directors beyond their capacity30. These powers have been gradually eroded under common law31, as well as through statute32. Whilst powers to seek restraint are still available ex-ante33, the only ex-post causes of action available are for breach of directors’ duties, or unfair prejudice, where this can be established by the shareholder34.

I would, therefore, advocate restoring these residual managerial powers in the hand of shareholders, to the fullest extent permitted under our European obligations35, as they could provide an effective weapon in the face of unrestrained directors36, especially for shareholders who are not necessarily in a strong bargaining position and have few methods to monitor directors37.

Reinvigorating private enforcement

Enforcement of these duties by shareholders has been described as ‘Herculean’38. Indeed, research by Armour suggests that private lawsuits against directors of publicly traded companies under corporate law are “virtually nil”39. Part 1140 sets out a number of restrictive criteria governing the admissibility of a derivative claim, the effect of which is to “increase the length of hearings and [costs]”41, thus deterring litigants42. Besides these procedural issues, strong judicial deference towards management decisions is undoubtedly an obstacle43.

I would argue, in line with Hannigan’s conclusions, that the lack of enforcement undermines the mandatory aspect of these obligations44, and would seek to reinvigorate these by: removing ratification as a bar to action45, and greatly streamlining the leave process so as to avoid these becoming ‘mini-trials’46.

Furthermore, I would, in line with Arden LJ’s dicta47, advocate expanding the use of Wallersteiner orders48, which indemnify shareholders’ costs under a derivative action, to cases under s.996, so as to make this action more attractive49.

D. Reducing agency costs through investor activism

Studies show that the ‘agency problem’50 linked to dispersed ownership is a reality in the UK51. What can be done to curb ‘divide and rule’ by directors52?

The UK Stewardship Code53, introduced in 2010, is aimed at making directors more responsive and accountable to shareholders by promoting more active “engagement” by  institutional investors54. Of particular interest are the recommendations on escalation, which, in the absence of constructive responses by the board, suggest a series of measures ranging all the way to the removal of directors55.

Given the key role played by institutional investors in the emergence of a pro-shareholder approach to takeover regulation56, a greater involvement on their part would be welcome. If, however, the current reforms are not effective, due consideration should be given to the proposal, advanced in the Myners Report57, to legally mandate fund managers to monitor and attempt to influence boards where this can be reasonably expected58. One must, however, note that the homogeneity amongst institutional investors which has historically guided shareholder centric self-regulation is rapidly starting to erode59, especially in light of the increase in foreign investors60.

1. Paul Davies & Klaus Hopt, ‘Control Transactions’ in Reinier Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press 2004) at 3 [↩]
2. Christopher Bruner, ‘Power and Purpose in the ‘Anglo-American’ Corporation’ (UCLA School of Law 2010) at 581 [↩]
3. See Part 28, Companies Act 2006; The Panel on Takeovers and Mergers, The Takeover Code (10th ed. 2011) [↩]
4. Christopher Bruner, ‘Power and Purpose in the ‘Anglo-American’ Corporation’ (UCLA School of Law 2010) at 607 [↩]
5. The Panel on Takeovers and Mergers, The Takeover Code (10th ed. 2011) at B1 [↩]
6. Ibid., See for eg. Financial Times, ‘UK takeover rules put targets on defensive’ [30th October 2011] ; Herbert Smith, ‘The UK takeover regime – the Takeover Code changes and their impact’ [Firm Briefing] [↩]
7. Financial Times, ‘Secret suitors outed’ [19 September 2011] ; Financial Times, ‘UK’s grip on M&A market loosens’ [30th October 2011] ; Mishcon de Reya, Changes to the Takeover Code: Shifting the Balance of Power [Firm Briefing]; [↩]
8. Henry Manne, ‘Corporate Governance: getting back to market basics’ in Alessio Paces, The law and economics of corporate governance: changing perspectives (Edward Elgar Publishing 2010) at 97 – Available online at: [↩]
9. Christopher Bruner, ‘Power and Purpose in the ‘Anglo-American’ Corporation’ (UCLA School of Law 2010) at 582 [↩]
10. Sections 168, 282, 303, 304 Companies Act 2006; The Companies (Shareholders’ Rights) Regulations, 2009, S.I. 2009/1632 [↩]
11. Sections 18–20, 283 Companies Act 2006 [↩]
12. The Companies (Model Articles) Regulations, 2008, S.I. 2008/3229, art. 4(1), schedule 3 [↩]
13. Section 239 Companies Act 2006 [↩]
14. Sections 641(1), 716(1) Companies Act 2006 [↩]
15. Christopher Bruner, ‘Power and Purpose in the ‘Anglo-American’ Corporation’ (UCLA School of Law 2010) at 605 [↩]
16. Paul Davies, ‘Gower and Davies’ Principles of Modern Company Law’ (8th ed. Sweet & Maxwell 2008) at 71 [↩]
17. See for eg. Percival v Wright [1902] 2 Ch. 421; Mutual Life Insurance Co of New York v Rank Org Ltd [1985] B.C.L.C 11; Shuangge Wen, ‘The magnitude of shareholder value as the overriding objective in the UK: the post-crisis perspective’ [2011] 26 Journal of International Banking Law and Regulation at 327 [↩]
18. Parke v Daily News [1962] Ch. 927 Ch D; Heron International Ltd v Lord Grade [1983] B.C.L.C 244 CA; Daniel Attenborough, ‘How directors should act when owing duties to the companies’ shareholders: why we need to stop applying Greenhalgh’ [2009] 20 International Company and Commercial Law Review at 339 [↩]
19. Greenlagh v Ardene Cinemas [1951] Ch. 286 CA [↩]
20. Ibid. at 291; also see Nourse L.J in Brady v Brady [1988] B.C.L.C 20 at 40 [↩]
21. s.170(1) Companies Act 2006 [↩]
22. s.172 Companies Act 2006 [↩]
23. Daniel Attenborough, ‘How directors should act when owing duties to the companies’ shareholders: why we need to stop applying Greenhalgh’ [2009] 20 International Company and Commercial Law Review at 345; Andrew Keay, ‘The Duty to Promote the Success of the Company: Is it Fit for Purpose?’ [2010] at 35) [↩]
24. Brenda Hannigan, ‘Board failures in the financial crisis – tinkering with codes and the need for wider corporate governance reforms: Part 1’ [2011] 32 Company Lawyer at 370 [↩]
25. See for eg. Jonathan Parker J in Regentcrest plc v Cohen [2002] 2 B.C.L.C. 80 at [124] [↩]
26. Andrew Keay, ‘The Duty to Promote the Success of the Company: Is it Fit for Purpose?’ [2010] at 13 [↩]
27. Ibid. at 33-34 [↩]
28. Stephen Griffin, ‘The rise and fall of the ultra vires rule in corporate law’ [1998] 2 Mountbatten Journal of Legal Studies at 5 [↩]
29. Ashbury Railway Carriage & Iron Co v Riche [1874] L.R. 7 H.L 1372 [↩]
30.  Lorraine E Talbot, ‘A contextual analysis of the demise of the doctrine of ultra vires in English company law and the rhetoric and reality of enlightened shareholders’ [2009] 30 Company Law at 324 [↩]
31. Attorney General v Great Eastern Railway Co [1879] L.R 5 App. Cas. 473 HL; Bell Houses Ltd v City Wall Properties [1966] 1 Q.B. 207 [↩]
32. Section 108(1) Companies Act 1989; s. 31(1) Companies Act 2006; s. 39 Companies Act 2006 [↩]
33. Section 40(4) Companies Act 2006 [↩]
34. Paul Davies, ‘Gower and Davies’ Principles of Modern Company Law’ (8th ed. Sweet & Maxwell 2008) at 479 [↩]
35. Paul Omar, ‘Powers, Purposes and Objects: The Protracted Demise of the Ultra Vires Rule’ [2004] 16 Bond Law Review at 108 [↩]
36. Lorraine E Talbot, ‘A contextual analysis of the demise of the doctrine of ultra vires in English company law and the rhetoric and reality of enlightened shareholders’ [2009] 30 Company Law at 348 [↩]
37. Ibid. at 355 [↩]
38. D Sugarman quoted in Andrew Keay, ‘Company Directors Behaving Poorly : Disciplinary Options for Shareholders’ [2007] Journal of Business Law at 676 [↩]
39. Armour et al, ‘Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’ (2009) 6 Journal of Empirical Legal Studies at 690 [↩]
40. Part 11, Companies Act 2006 [↩]
41. Brenda Hannigan, ‘Board failures in the financial crisis – tinkering with codes and the need for wider corporate governance reforms: Part 1’ [2011] 32 Company Lawyer at 370 [↩]
42. Arad Reisberg, ‘Shadows of the Past and Back to the Future: Part 11 of the Companies Act 2006 (In)Action’ [2009] 6 European Company and Financial Review at 219 [↩]
43. See for eg. Continental Assurance Co Ltd [2001] B.P.I.R 733; Liquidator of Mariani Ltd v Dickensen [2003] EWHC 334 [↩]
44. Brenda Hannigan, ‘Board failures in the financial crisis – tinkering with codes and the need for wider corporate governance reforms: Part 1’ [2011] 32 Company Lawyer at 369-370 [↩]
45. Andrew Keay and Joan Loughrey, ‘Derivative Proceedings in a Brave New World for Company Management and Shareholders’ [2010] 3 Journal of Business Law at 162 [↩]
46. Ibid. at 177 [↩]
47. Clark v Cutland, [2003] EWCA Civ 810, [2003] 2 BCLC 393 at [35] [↩]
48. Wallersteiner v Moir (No. 2) [1975] QB 373 [↩]
49. Petri Mantysaari, Comparative corporate governance: shareholders as a rule-maker (Springer 2005) at 101- Extract available at: [↩]
50. See: Berle and Means, The Modern Corporation and Private Property (2nd revised ed. Transaction Publishers 1991) [↩]
51. Paul Davies, Introduction to Company Law (2nd ed, Oxford University Press 2010) at 136 [↩]
52. Financial Times, ‘UK: Stewardship code aims to encourage collaboration’ [Oct. 6th 2010] [↩]
53. Financial Reporting Council, The UK Stewardship Code [2010] [↩]
54. Op. Cit. 1 [Intro]; Financial Times, ‘UK: Stewardship code aims to encourage collaboration’ [Oct. 6th 2010] [↩]
55. Financial Reporting Council, Implementation of the UK Stewardship Code [2010] at 1–2 ; Christopher Bruner, ‘Corporate Governance Reform in a Time of Crisis’ [2011] 36 Journal of Corporation Law at 319 [↩]
56. Andrew Johnston, ‘Takeover Regulation: Historical and Theoretical Perspectives on the City Code’ [2007] 66 Cambridge Law Journal at 436–41 [↩]
57. HM Treasury, Institutional Investors in the United Kingdom: A Review [2001] [↩]
58. Paul Davies, Introduction to Company Law (2nd ed, Oxford University Press 2010) at 136 [↩]
59. Christopher Bruner, ‘Corporate Governance Reform in a Time of Crisis’ [2011] 36 Journal of Corporation Law at 330 [↩]
60. Brian Cheffins, ‘The Stewardship Code’s Achilles’ Heel’ [2010] 73 The Modern Law Review at 1020 [↩]