Majority and Minority Shareholders

Where a company has a controlling or a small group of controlling shareholders, the non-controlling shareholders are at risk that the controllers will extract private benefits of control at the expense of the non-controllers. UK company law contains a wide range of techniques for addressing this issue, some more effective than others. This chapter begins by examining the various ways in which well-advised investors can contract for protection before they enter the company and how the law protects the agreements reached. The second part discusses rights to exit the company upon the occurrence of certain events. The third part discusses disclosure rights, designed to bring self-dealing transactions into the open. The fourth focuses on ways of structuring the board or shareholder body when the decision before it carries a high risk of self-dealing. The final part considers cases where the courts review the substantive fairness of the controllers’ conduct, notably, but not only, the provisions on ‘unfair prejudice.

Markets and The Shareholders As A Class

This chapter analyses the way in which company law shapes two important markets—the market for executives and the market for corporate control—in the hope of addressing the agency problems identified in Chapter 1. Both sets of rules are controversial. The rules on executive pay make use of independent directors on remuneration committees and various forms of ‘say on pay’ to structure executive remuneration. But they have been criticised for not robustly linking pay to performance and for setting pay at socially unacceptable levels. The rules on the market for corporate control, set out mainly in the Takeover Code, contain a very strong version of the non-frustration rule, making it difficult for incumbent managers to defend themselves against unwelcome bidders. Here, it is heavily debated whether the rule promotes managerial efficiency or encourages ‘short termism’.

8. Liability and Enforcement

The effective enforcement of law requires that liability be appropriately allocated, that those with the appropriate incentives be in a position to enforce the liabilities thus created and that the sanctions available be effective. Otherwise, the substantive law may be ineffective in practice.This chapter examines these issues in relation to companies and individuals connected to companies in three contexts: civil law (mainly contract and tort), criminal law, and regulatory rules. Although much of the background law is of general application, it applies in a particular way to companies and individuals engaged in corporate activities.

7. Creditors

Because of limited liability, creditor protection has always been a feature of company law. Large creditors can contract ex ante for customised protection and the law facilitates this in various ways, notably by the creation of the floating charge. Non-adjusting creditors require the protection of mandatory rules, at least in some situations. Creditor protection in relation to companies in the vicinity of insolvency is now well established, not only through ‘wrongful trading’ but also via transaction invalidity rules and directors’ disqualification. For going-concern companies the emphasis is on rules restricting the shifting assets to shareholders via distributions and associated rules relating to the maintenance of capital.

5. Majority and Minority Shareholders

Where a company has a controlling or a small group of controlling shareholders, the non-controlling shareholders are at risk that the controllers will extract private benefits of control at the expense of the non-controllers. UK company law contains a wide range of techniques for addressing this issue, some more effective than others. This chapter begins by examining the various ways in which well-advised investors can contract for protection before they enter the company and how the law protects the agreements reached. The second part discusses rights to exit the company upon the occurrence of certain events. The third part discusses disclosure rights, designed to bring self-dealing transactions into the open. The fourth focuses on ways of structuring the board or shareholder body when the decision before it carries a high risk of self-dealing. The final part considers cases where the courts review the substantive fairness of the controllers’ conduct, notably, but not only, the provisions on ‘unfair prejudice.

Liability and Enforcement

The effective enforcement of law requires that liability be appropriately allocated, that those with the appropriate incentives be in a position to enforce the liabilities thus created and that the sanctions available be effective. Otherwise, the substantive law may be ineffective in practice.This chapter examines these issues in relation to companies and individuals connected to companies in three contexts: civil law (mainly contract and tort), criminal law, and regulatory rules. Although much of the background law is of general application, it applies in a particular way to companies and individuals engaged in corporate activities.

Directors’ Duties

This chapter examines the law on directors’ duties, as restated in the Companies Act 2006, other than the core duty of loyalty which is discussed in Chapter 2. It covers the duty of care, the duty to act within powers, the duty to exercise independent judgement, and, most importantly, the application of fiduciary duties to various types of conflict of interest. Many of the most interesting doctrinal questions about company law arise in this area and it is righly placed at the center of many company law courses. However, it may that other sets of rules, discussed in earlier chapters, are more important in practice in the regulation of internal company relations. In addition to the substantive law, the remedies available in respect of breaches are analysed, as is the freedom of shareholders to waive breaches of duty, both after and before the event.

Governance and The Shareholders As A Class

This chapter examines in more detail the role company law allocates to shareholders. The first part of the chapter analyses the rationales for requiring some corporate decisions not to be fully delegated to the board. Mandatory involvement of the shareholders is limited to a small number of corporate decisions. In the absence of a statutory requirement for shareholder input into the decision, the chapter examines how easy it is for shareholders who wish to involve themselves in corporate decision-making to do so, whether in the case of particular decisions or by removing directors of whose management they disapprove. The second part of the chapter discusses the recent development of regulatory pressures on institutional shareholders to ‘engage’ with the companies in which they invest. This is a development associated above all with the Stewardship Code and is based on the notion that shareholders have a bigger contribution to make to the management of large companies than the Companies Act assumes to be the case.

1. Introduction

This chapter analyses the organisational structure created by company law for the conduct of business through its five core features: recognition of the company as an entity distinct from all its shareholders; limited liability for shareholders; specialised management, separate from the shareholders; the lock-in of the shareholders’ contributions coupled with ease of transfer of the shareholder interest; and free allocation of rights of control over the company to the members of the company. At the same time, the chapter identifies the agency problems created by this structure, the regulation of which is discussed in the following chapters. The chapter also briefly sketches the multiple sources of company law.

3. Governance and The Shareholders As A Class

This chapter examines in more detail the role company law allocates to shareholders. The first part of the chapter analyses the rationales for requiring some corporate decisions not to be fully delegated to the board. Mandatory involvement of the shareholders is limited to a small number of corporate decisions. In the absence of a statutory requirement for shareholder input into the decision, the chapter examines how easy it is for shareholders who wish to involve themselves in corporate decision-making to do so, whether in the case of particular decisions or by removing directors of whose management they disapprove. The second part of the chapter discusses the recent development of regulatory pressures on institutional shareholders to ‘engage’ with the companies in which they invest. This is a development associated above all with the Stewardship Code and is based on the notion that shareholders have a bigger contribution to make to the management of large companies than the Companies Act assumes to be the case.