Supremacy Of Shareholder Interest Essay

Question:

Assume you have been employed as a Corporate Governance Consultant by the Australian Institute of Company Directors (AICD). The AICD is concerned that many company directors hold the opinion that the company’s board of directors has a responsibility to place the interests of shareholders above all other stakeholder interests. Your assignment is to prepare a report to be submitted to the AICD evaluating the evidence that the responsibility of a company director is to place shareholder interests above those of other stakeholders.

Answer:

Introduction

One of the key characteristics of companies or corporations, as they are known in Australia, is the separate legal entity. As per this concept, the corporation has a separate status from its owners and from the ones who are responsible for running its operations (Wibberley, Chambers and Gioia, 2017). Based on this concept, the companies have been stated to have the two objectives of surviving and thriving. And it has also been stated that the shareholder value is not the sole objective of the company, as that is the result of the activities which are undertaken by the corporations. The shareholders trust the directors of the company and in turn, they are treated as just the audience of the board. Ad hence, being the audience, they are called the stakeholders, putting them in the category of other stakeholders like the bondholders, customers and NGOs. And ultimately, the directors have to chose between the different audiences and place them on a hierarchy of significance (Eccles and Youmans, 2015).

However, this report presents an altogether different view. Through this report, an attempt has been made to show that the interest of the shareholders is kept supreme by the board of directors of the company. This has been done through examples and evidence brought forward. Lastly, before drawing up the conclusion, some recommendations have been drawn which can guide the board to be more responsive towards the different stakeholder audience.

Theories

Proprietary theory is amongst the theories which give importance to the view of the shareholders supremacy. This theory has been evolved from the from the ownership of sole proprietor form, and has influenced the management practices and the corporation regulations. Under this theory, the shareholder is solely focused when the objectives of the organization are drawn. So, this theory is focused upon the interest of the owners, which are the shareholders who hold the shareholding in the company. Based on this theory, the profits are seen as distributable to the owners or continue to remain with the company so that the same can be used for increasing the wealth of the owner. And many of the elements of this theory can be seen in the contemporary corporate governance practices, particularly the OECD principles on corporate governance, which have been discussed later on. Another basic example of this is in the terminology used, where the dividends denote the distribution of profit, and the interest which is paid to the creditors is deemed as the company’s expense (Godfrey et al. 2017).


Another theory which acts as a safeguard of the stakeholders, but is more or less concentrated upon shareholder interest is that of the company is the entity theory. Under the entity theory, the doctrine of separate legal entity is given supremacy. Hence, based on this concept, the owners of the company, which is the shareholders in this case due to them holding the shares in the company, have to be treated in a separate manner as the company. Further, the rights and liabilities of the owners of the company and that of the company are to be dealt with in a separate manner (Schneeman, 2009). This theory also upholds the value of accountability. Under the traditional view of this theory, it is assumed that the company operates for benefiting the ones who provide the funds for entity and based on this approach, the equity holders manage the funds. However, the new interpretation of this theory states that the entity is only concerned with its own survival and for this, good relationship is to be maintained with the equity holders as they provide the additional funds. So, unlike the stakeholder theory, the entity stands for the supremacy of the shareholder interest.

OECD Principles

When the OECD Principles regarding the corporate governance are looked at, even they seem to be biased towards the shareholder rights. These rights have been drawn so as to secure the ownership registration method, the relevant and material information being obtained from the company on regular and timely manner, conveying or transferring of shares, sharing of company profits, electing and removing the board members, and participating and voting in the general meetings. It has also been stated by the OECD that the shareholders should be given a right of participation and being informed on the fundamental corporate changes related decisions (OECD, 2015). Even the other statements made by OECD are concentrated upon the shareholder interests. This makes it very clear that not only the theories related to corporate governance are biased towards the supremacy of the shareholder interest over the interest of the other stakeholders the same is the case for the OECD Principles.

Supremacy of Shareholder Interest

Shareholders are those people, who invest their money in the company, and on the basis of this invested money, the company gets the capital to carry out its operations and further grow and diversify itself. This makes it obligatory for the board of directors, to keep the interest of the shareholders supreme. This can be evidenced at the different places, where time and again, the shareholders interest has been given supremacy. Some of these have been summarized below.

Piercing Corporate Veil

The concept of separate legal entity, in the nation, has been used simultaneously with the doctrine of piercing the corporate veil. This principle was born from the case of Salomon v Salomon & Co [1897] AC 22 (Kershaw, 2012). This concept has continued to be unexpurgated from the Anglo-Australian corporate law for over a hundred years. The company acts in its own rights and it does not act as an alias for the controllers. Hence, the shareholders are not liable for the debts of the company, beyond what has been their initial capital investment. The shareholders are often denied the protection from the limited liability, in such cases where the court deems it necessary to pierce the corporate veil. The court can also pierce the corporate veil of the company when this is requested by the shareholders of the company. In the case of Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254, it was stated that the separate legal status of the company would be set aside and the legal personality of the real controllers would be looked in cases, where the court deems fit (Ramsay and Noakes, 2001).


The agency is one of the grounds in which the veil of the company is lifted. Agency has been, in this sense, often used interchangeably with the alter ego of the shareholders. And in such cases, in order to protect the other shareholders of the company, the veil is pierced to ascertain the degree of effective control where the company is deemed as the shareholder’s agent. In cases of unfairness also and for the interest of justice to prevail, in RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 (Unreported, Supreme Court of New South Wales, Cole J, 17 December 1993), the director was held liable for the losses regarding the contracts which he entered with the plaintiff. So, to uphold the interest of the other shareholders, even when some of the shareholders are involved in such actions, the court lifts the corporate veil, so that the rights of the other shareholders can be protected (Ramsay and Noakes, 2001).

Class/ Collective Actions

Even though the collective action proceedings can be brought in different jurisdictions in the nation, under the different legislations, they are general brought under the NSW, Victorian or the Federal Courts. Class actions give the rights to the shareholders of a company, to uniformly ring action against dispute which has been raised. In the Australian class action landscape, the shareholder class actions are not only growing but also are being dominating. The security holders form the major proportion of the people bringing the class actions at the present. The prominence of the product liability claims by the investors and shareholders have increased. Around 60% of the proceedings which had been filed under the Part IVA of the Federal Court of Australia Act 1976 (Cth), were brought through the shareholders and the investors (Newbold, Murphy and Watts, 2016).

In the shareholder class actions, the causation remains a key issue. In the case brought before the court, i.e., the case of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482, the actions were brought by the plaintiff shareholders, who had purchased the shares in publicly listed company at prices which were inflated, were allowed to recover the loss without having the need to show a direct link between the decision to purchase and the misleading and deceptive conduct of the company (Adams, 2009).

Corporations Act

Corporations Act, 2001 (Cth) is an act of commonwealth which is applicable in the whole of Australia. Under this act, the directors have been given the responsibility to govern the company on behalf of the shareholders. The wordings are emphasized upon shareholders, instead of stakeholders (Cassidy, 2006). As per section 198A(1) of this act, the business of the company has to be managed under the directions of, or by the director of the company (ICNL, 2017). Along with this, the duties of the directors have been contained in Part 2D.1 under Chapter 2D (Federal Register of Legislation, 2017). The emphasis of these duties is to run the affairs of the company in a diligent, faithful and proper manner, so that the rights of the shareholders are protected. Due to the interest of the director of the company, the shareholders have to be given the top priority and the best interest of the company has to be given the priority always (ASIC, 2017).

The supremacy of upholding the rights of the shareholders can further be emphasized from the right which has been given to the shareholders to inspect the books of the company. This right has been given to the shareholders under section 247A of the Corporations Act (Australian Government, 2017). Under this case, the right is granted when the court is satisfied that the shareholder acts in good faith and for proper purpose, wants to inspect the books. The leading cases in which this right was upheld and the scope of this section was considered, were in the cases of Mesa Minerals Limited v Mighty River International Limited [2016] FCAFC 16, Acehill Investments Pty Ltd v Incitec Ltd No SCCIV-02-1419 [2002] SASC 344 and Hanks v Admiralty Resources NL [2011] FCA 891 (Mainprize, 2017).

Section 1324 of the Corporations Act, 2001, which was erstwhile known as section 574 of the Corporations Law, gave the legal standing to the regulator, i.e., the Australian Securities and Investments Commission, along with to such individuals, whose interest were to be affected, to obtain a declaration from court or an injunction against the directors and the others, who contravened the statutory duties, which have been placed down under the act. Through this section, the court can award damages to the person who has brought the action, along with to such actions, where the relevant plaintiff may be associated (Australian Institute of Company Directors, 2005).


The oppression of minority shareholders is something which is common to each and every act related to the governing of companies, in the different nations. In such cases, where the shareholders get the feeling that they are being oppressed, due to being in minority or that they are being dominated by the majority shareholders, or anyone else, they can bring the action to the court against the oppression of their rights. Through the Corporations Act, the Supreme Court of NSW, along with the other courts, have been given the discretion to make the order in such cases, where the conduct of the director is found to be contrary to the interest of the members of the company, unfairly prejudicial or oppressive. However, even when the law has provided this safeguard to the shareholders, often, the court refuses to wind up the company which is solvent, even with the presence of oppression of the minority shareholders by the board of directors.

These issues have been considered and the prime example of this issue being solved was seen in the case of Hillam v Ample Source International Ltd (No. 2) (2012) FCAFC 73 (BRI Ferrier, 2015). In this case, it was held that that the minority shareholders of the company were oppressed owing to the demeanor of the board of director. Along with this, notwithstanding the solvency, it was deemed as the right decision to wind up the company up and to allow for the assets of the company to be distributed amongst the shareholders (Gibson Howlin Lawyers, 2012). Through the minority oppression section, in particular, section 232 of this act, the wide ranging powers grant the relief to the shareholders in case the affairs of the company are contrary to the interest of the shareholders in an entirety, or where there is an unfairly discriminatory, oppressive, or prejudicial, conduct against the shareholder(s) in any capacity. However, a key requirement here is that the unfairness had to be present and merely the discrimination and prejudice would not suffice (Australian Institute of Company Directors, 2013).

Recommendations

The discussion carried above has highlighted that the company directors can still undertake a lot of steps to show there responsiveness towards the diverse stakeholder audiences, including the shareholders of the company. There is a need for the directors to strictly take actions against such shareholders in a timely manner, so that the court does not fine the need to intervene and to lift the corporate veil. Moreover, in such cases, by effectively taking the steps, for instance, by blowing the whistle or by bringing the matter to the board of directors, such issues can be addressed at the proper time. The class actions are another aspect in which the enhanced role of the board can save the interest of the stakeholders. Before a class action is initiated and the matter is brought before the directors, they should effectively address the issues and even place the before the board of directors and the committees of the board. This would enable the matter to be resolved, without having to go through the litigation process, which is both timely and cost consuming process. Moreover, there is a strict need for adherence with the provisions of the Corporations Act, which act as guidance for the directors, towards safeguarding the interests of the stakeholders, primarily the shareholders.

Conclusion

From the point presented in the preceding parts of this report, it can be concluded that the shareholder interest is something, which is kept supreme by the directors of the company. This is primarily due to the governing act, i.e., the Corporations Act, 2001, which makes it obligatory for the directors to keep the interest of the shareholders of the company, as the top priority. The discussion initiated with the concept of separate legal entity which gives the companies, a separate status from its owners and the ones who run the business of the company. A related concept to this doctrine is the principle of corporate veil piercing, where in just cases, the court can pierce the corporate veil of the company, to hold the people who actually undertook a particularly unfair task, liable for their acts. The veil is pierced so that the interests of the directors can be upheld. The discussion also highlighted the manner in which the corporations act and the class actions help in keeping the interest of the shareholders protected and hence, at supremacy level for the directors. Lastly, the recommendations presented here, act as guidance for the company directors to improve upon the interest of the stakeholders, which include the shareholders of the company.

References

Adams, M.A. (2009) Australian Corporate Governance: Lessons from HIH Insurance. [Online] Australasian Legal Information Institute. Available from: [Accessed on: 29/07/17]

ASIC. (2017) Directors' key responsibilities. [Online] ASIC. Available from: [Accessed on: 29/07/17]

Australian Government. (2017) Corporations Act 2001. [Online] Australian Government. Available from: [Accessed on: 17/06/17]

Australian Institute of Company Directors. (2005) Section 1324 finally shown to work. [Online] Australian Institute of Company Directors. Available from: [Accessed on: 29/07/17]

Australian Institute of Company Directors. (2013) Don’t forget minority shareholders. [Online] Australian Institute of Company Directors. Available from: [Accessed on: 29/07/17]

BRI Ferrier. (2015) Breakdown in corporate relations: winding up on the just and equitable ground. [Online] BRI Ferrier. Available from: [Accessed on: 29/07/17]

Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.

Eccles, R.G., and Youmans, T. (2015) Why Boards Must Look Beyond Shareholders. [Online] MIT Sloan Management Review. Available from: [Accessed on: 29/07/17]

Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: [Accessed on: 29/07/17]

Gibson Howlin Lawyers. (2012) Oppression of Minority Shareholders. [Online] Gibson Howlin Lawyers. Available from: [Accessed on: 29/07/17]

Godfrey, J., et al. (2010) Accounting Theory. 7th ed. New Jersey: John Wiley & Sons.

ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: [Accessed on: 29/07/17]

Kershaw, D. (2012) Company Law in Context: Text and Materials. 2nd ed. Oxford: Oxford University Press.

Mainprize, S. (2017) Shareholders And The Right To Inspect Company Books. [Online] ERA Legal. Available from: [Accessed on: 29/07/17]

Newbold, B., Murphy, R., and Watts, K. (2016) Class/collective actions in Australia: overview. [Online] UK Practical Law. Available from: [Accessed on: 29/07/17]

OECD. (2015) Recommendation of the Council on Principles of Corporate Governance. [Online] OECD. Available from: [Accessed on: 29/07/17]

Ramsay, I.M., and Noakes, D.B. (2001) Piercing the Corporate Veil in Australia. Company and Securities Law Journal, 19, pp. 250-271.

Schneeman, A. (2009) Law of Corporations and Other Business Organization. 5th ed. New York: Delmar.

Wibberley, J., Chambers, G., and Gioia, M.D. (2017) Lifting, Piercing And Sidestepping The Corporate Veil. Guildhall Chambers. [Online] Available from: [Accessed on: 29/07/17]

How to cite this essay: