BPP University College Of Professional Studies Limited (BPP)
This is a sample essay for the BPP Law Review and Reform module (LRR) written in December 2020. It was graded 70% so hopefully it can help you write your own essay.
BPP University College Of Professional Studies Limited (BPP)
BPP University College Of Professional Studies Limited
Law Review and Reform
All documents for this subject (1)
10
reviews
By: bijendrasingh • 4 months ago
By: goliver25 • 3 months ago
By: agwinnutt • 5 months ago
By: alimansoor • 1 year ago
By: adusox22 • 1 year ago
By: nadiax1dx • 1 year ago
By: ioanaralucabirsan • 1 year ago
Show more reviews
Seller
Follow
brigittesnotes
Reviews received
Content preview
LAW REVIEW AND REFORM
REFORMING S.172 CA 2006 (DIRECTORS’ DUTIES)
1. Introduction:
Section 172 the most significant and also the most controversial duty that has been introduced
under the Companies Act in 2006 (CA 2006). Although s.172 was put in place to clarify the law,
it has attracted constant academic debate since it first came into force.
This essay will critically evaluate the effectiveness of s.172 and the current enforcement
regime surrounding it will conclude that the section is not fit for purpose in its current form
and thus, reforms are likely to be necessary. Although the section includes stakeholders in
the decision-making processes, the consideration of stakeholders’ interests is often reduced
to a box-ticking exercise in practice. In addition, compliance with s.172 is weak across the UK
which is likely due to the lack of enforceability and the unclear legislative drafting which allows
for misinterpretation.
This essay will also discuss and critically analyse three proposals for reforming s.172. The
first proposal involves setting up more inclusive decision-making processes, the second
proposal will be regarding the appointment of employees onto the board of directors and the
final proposal will involve the introduction of a new enforcement regime.
2. Critical evaluation of s.172 as it stands today:
2.1 A move towards Stakeholder Primacy?
In recent years, the relationship between companies and their stakeholders has been at the
heart of debate. s.172 encapsulates the Enlightened Shareholder Value approach to corporate
governance whereby the legislation primarily promotes the interests of the shareholders
rather than the interests of the stakeholders.
On the reformulation of directors’ duties in 2006, the UK Parliament decided to include
stakeholders in s.172 and this inclusion represents a significant improvement when
compared to previous law. During the enactment of CA 2006, a minister commented that
s.172 ‘marks a radical departure in articulating the connection between what is good for a
company and what is good for society at large’.1 The White Paper on Modernising Company
Law2 has also expressed that including stakeholders in the act is beneficial and would
encourage directors to aim for long-term success in making their decisions and to recognise
that the company’s relationships with stakeholders, including employees, suppliers and
customers, greatly contribute to the company’s success.3
However, the inclusion of stakeholders is subtle4 and it would be difficult to argue that the
section represents the ‘dual consideration theory’ which requires consideration to both
shareholders and stakeholders in director decision-making processes. According to s.172,
there is no separate duty owed to stakeholders.5 Although directors must ‘have regard to’
how each of their decisions will affect stakeholders, as the wording leaves ample room for
1
Duties of Company Directors (DTI, June 2007), Introduction and Statement of Rt Hon Margaret Hodge.
2
https://publications.parliament.uk/pa/cm200203/cmselect/cmtrdind/439/439.pdf
3
https://publications.parliament.uk/pa/cm200203/cmselect/cmtrdind/439/439.pdf
4
Section 172 CA 2006: the ticket to stakeholder value or simply tokenism? RACHEL C. TATE* <
https://www.abdn.ac.uk/law/documents/Section172CA2006-
thetickettostakeholdervalueorsimplytokenism.pdf >
5
A Keay, ‘The duty to promote the success of the company: is it fit for purpose?’ (2010) University of Leeds
School of Law, Centre for Business Law and Practice Working Paper, 4 <
https://poseidon01.ssrn.com/delivery.php?ID=764097064115113088101029109080075029057062017031026
02600509010106700709102808301703110100702204102602701710302806608302100307104103400502307
80690121061080931070890300850761270720310920710041220010880780930801130660640301120840840
72084106083116110124&EXT=pdf> accessed on 3 November 2020.
, director discretion, this can be reduced to a box-ticking exercise in practice, whereby
consideration is given simply as a defence to potential litigation.
On the other hand, it could be argued that the wording is sufficient in its current form. The
British Banker’s Association argued that any change to the existing system of accountability
for directors would make the UK less attractive for foreign investors and the wording of s.172
has achieved relative stability in this regard.6 If could also be argued that effective boards
would instinctively consider and balance the interests of stakeholders without much
legislative intervention, since they would recognise that this is necessary for the company’s
success.
Based on the above-mentioned arguments, it can be seen that while s.172 takes a step
towards setting up more inclusive decision-making processes, it is questionable whether the
wording in s.172 is effective in requiring directors to consider the effects of their decisions on
stakeholders in practice.
2.2 Enforcement:
s.172 relies on private enforcement of directors’ duties, whereby the duties are enforced by
the shareholders who may bring derivative actions under s.260 CA 2006 on the company’s
behalf. Despite the UK’s heavy reliance on private enforcement, a number of commentators
such as Reisberg7, Hirt8 and Parkinson9 as well as government reports10, have pointed out that
the private enforcement mechanisms in place have been widely ineffective.
It is clear that shareholders will often refrain from bringing derivative claims in practice
thereby greatly limiting the effectiveness of the duties. This is due to the fact that prior to
bringing derivative action, shareholders must obtain court approval,11 encounter the other
procedural hurdles to derivative action that are extremely difficult to overcome such as
establishing prima facie case, the possibility of the company itself authorising or ratifying the
breach and that derivative action is considered by the court as a last resort weapon.12
Although the courts are right in aiming to avoid vexatious claims against directors, as per
the current state of the law, if directors fail to adhere to s.172, there will likely be no
consequences.
By contrast, it could be argued that even though shareholders are unlikely to bring a
derivative action, employees are now able to bring an action against directors in some
circumstances and thus, the current private enforcement regime should be maintained.
Prior to 2019, stakeholders had no standing to bring a claim and thus the act would not give
rise to a remedy which those stakeholders could enforce.13 However, this position has slightly
changed following the decision in Antuzis v DJ Houghton14, in which employees were given a
direct remedy against directors where the directors failed to have regard to the interests of
their employees. Whilst the decision may appear to partially solve the shortcomings of the
enforcement regime, it will likely only apply in very limited circumstances.
As a whole, the current system of enforcement defeats the purpose of s.172 as directors are
given no incentive to comply with their duty despite the judicial activism seen in Antuzis.
6
https://publications.parliament.uk/pa/cm201617/cmselect/cmbeis/702/70206.htm
7
A. Reisberg, Derivative Actions and Corporate Governance (Oxford, OUP, 2007).
8
H. Hirt, The Enforcement of Directors’ Duties in Britain and Germany (Bern, Peter Lang, 2004);
9
J. Parkinson, Corporate Power and Responsibility (Oxford, Clarendon Press, 1993) at Chapter 8;
10
For example, see Department of Business Innovation and Skills, Transparency and Trust : Enhancing The
Transparency of UK Company Ownership and Increasing Trust in UK Business:, Discussion Paper, July 2013 at
para 8.13 and accessible at :
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/212079/bis-13-959-
transparency- and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing-trust-in-uk-
business.pdf.
11
Companies Act 2006, ss 261-262.
12
Andrew Keay and Joan Loughrey, ‘Derivative Proceedings in a Brave New World for Company Management
and Shareholders’ (2010) 2 Journal of Business Law 152-161
13
Said v Butt [1920] 2 KB 497.
14
Antuzis v DJ Houghton Catching Services Ltd [2019] EWHC 843 (QB).
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller brigittesnotes. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $21.33. You're not tied to anything after your purchase.
