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s.172 Duty to promote the success of the company - Coggle Diagram
s.172 Duty to promote the success of the company
S.172(1) Companies Act 2006:
‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(d) the impact of the company’s operations on the community and the environment,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(b) the interests of the company’s employees, (look back to cake and ale)
(f) the need to act fairly as between members of the company.’
Non-exhaustive list under s.172(1) CA 2006, therefore human rights can also be considered because it is non-exhaustive.
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) (s.172(1) CA 2006)
‘A director of a company must act in the way he considers, in good faith’
– this is a subjective test which codifies Re Smith & Fawcett. The statute preserves the policy of courts not intervening in business decisions.
‘would be most likely to promote the success of the company for the benefit of its members as a whole’
– puts into statute that companies should be run for the benefit of shareholders, this has no concrete legal foundation. This actually reflects that companies should be run for the benefit of their shareholders.
‘and in doing so have regard (amongst other matters) to’
– the objective of the company is to benefit the shareholders though in doing so it should have ‘regard’ to other matters.
‘regard’
– questions over what this means. Company needs to have regard for these factors when trying to maximise the benefit for the shareholders.
Director should act in (subjective) good faith in the interests of the company: Re Smith & Fawcett.
The interests of the company were widely held to refer to the collective interest of present and future shareholders. But this was never explained in any case.
The closest thing we get to an explanation is in Greenhalgh v Arderne Cinemas [1951] Ch 286
They were talking about altering company constitution which they said must be for the benefit of the company as a whole which was meant to be the shareholders collectively.
This was not a directors duty case. This was a case about alteration. It concerned the actions of shareholders and protecting minority shareholders against the majority.
Subjective good faith rule preserved: courts’ policy of non-intervention should continue
‘Interests of the company’ replaced by ‘promote the success of the company for the benefit of its members as a whole’ – a purported codification of Hutton v West Cork Railway – but reflecting dominant shareholder value ideology, that companies should be run for the benefit of their shareholders.
Company Law Review thought they were simply codifying the position in Hutton v West Cork Railway but what they ended up doing was legislating the dominant ideology that companies should be run for the benefit of their shareholders.
The benefit of the company as a whole referring to the shareholders as little concrete foundation in the law. It is a reliance on Greenhalgh v Arderne Cinemas [1951] Ch 286 which is a misinterpretation.
‘The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.’ (Hutton v West Cork Railway)
Enlightened shareholder value not pluralist approach to the corporate objective.