full summary for Comparative Corporate Law. It has all the case law discussed in the seminars as well as the lecture (which are given in the syllabus). This summary is a combination of both the lecture and seminars.
week 1: Introduction to corporate governance I: board of directors
● core characteristics of business corporations
○ Business corporations are distinct legal entities with several core
characteristics. They possess legal personality, meaning they can own
property, sue, and be sued in their own name. Shareholders enjoy limited
liability, which confines their financial responsibility to their investment in the
corporation. The shares of a corporation are transferable, facilitating easy
buying and selling. Corporations are owned by investors who hold these
shares, and management is typically delegated to a board of directors,
separating ownership from day-to-day management.
● corporate governance models
○ Shareholder-Oriented Model: This model focuses on maximizing shareholder
value. It is predominant in the United States and the United Kingdom, where
the primary duty of directors is to act in the best interests of the shareholders.
○ Stakeholder-Oriented Model: This model considers the interests of all
stakeholders, including employees, customers, suppliers, and the community.
It is more common in European countries, where directors are expected to
balance the needs of various stakeholders, not just shareholders.
● different board structures + advantages and disadvantages
○ One-Tier Board: In this structure, a single board comprises both executive
and non-executive directors. The advantage of a one-tier board is that it
facilitates direct communication and decision-making between executives and
non-executives. However, it may also lead to conflicts of interest as
executives who are involved in daily operations might dominate the board.
○ Two-Tier Board: This structure separates the supervisory board from the
management board. The supervisory board oversees the management board,
which handles daily operations. The advantage is a clear separation of
oversight and management functions, reducing conflicts of interest. The
disadvantage is potential communication gaps and slower decision-making
due to the separation.
● key conflicts between shareholders and board of directors
○ Conflicts between shareholders and the board of directors often arise due to
differing interests and goals. Shareholders typically seek to maximize their
returns on investment, while directors might focus on long-term stability and
growth, which might not always align with short-term profit goals. Additionally,
conflicts can occur if directors prioritize their interests or compensation over
the shareholders' interests.
● interests of the boards
○ Boards of directors are expected to act in the best interests of the corporation.
This includes considering long-term sustainability, profitability, and the
interests of all stakeholders. In shareholder-oriented models, the primary
focus is on maximizing shareholder value. In stakeholder-oriented models,
boards balance the needs of various stakeholders, ensuring fair treatment
and considering the broader impact of corporate actions.
● fiduciary duties and the enforcement
○ Fiduciary duties of directors include the duty of care, duty of loyalty, and duty
of good faith. The duty of care requires directors to make informed and
, deliberate decisions. The duty of loyalty mandates that directors act in the
best interests of the corporation, avoiding conflicts of interest and self-dealing.
The duty of good faith requires honesty and integrity in fulfilling their
responsibilities.
○ Enforcement of fiduciary duties typically involves legal mechanisms such as
derivative suits, where shareholders sue on behalf of the corporation. In
jurisdictions like Delaware, courts apply rigorous standards to ensure
directors comply with their fiduciary duties, particularly in cases involving
conflicts of interest.
● how business judgment rule is applied
○ The business judgment rule is a legal principle that protects directors from
liability for decisions that result in loss or damage, provided they acted in
good faith, with due care, and in the best interests of the company. This rule
acknowledges that directors must often make decisions involving risk and
uncertainty. Courts generally refrain from second-guessing business
decisions unless there is evidence of gross negligence, fraud, or self-dealing.
The rule presumes that directors' decisions are made on an informed basis, in
good faith, and with the honest belief that the action taken was in the best
interests of the company. If these conditions are met, directors are shielded
from personal liability, encouraging them to take necessary risks for the
benefit of the corporation.
Lecture 1
Introduction
Corporate governance involves the system by which corporations are directed and
controlled. A corporation is a legal entity separate from its owners, characterized by its legal
personality, limited liability for its shareholders, transferable shares, and investor ownership.
Management is typically delegated to a board of directors. There are two main board
structures: the one-tier board, which includes both executive and non-executive directors,
and the two-tier board, which has a separate supervisory board and management board.
Agency theory addresses conflicts of interest between various stakeholders within a
corporation. There are three main types of agency problems. Vertical conflicts arise between
shareholders and managers, as seen in cases like Wirecard in Germany and the FTX
exchange in the Bahamas. Horizontal conflicts occur between minority shareholders and
controlling shareholders, exemplified by the bonus structure disputes at Tesla in the USA.
Societal conflicts involve the firm and broader society, such as the environmental issues
caused by chemical, gas, and oil companies.
Directors' Duties in the US
Directors in the US have three primary duties: the duty of good faith, the duty of loyalty, and
the duty of care. The duty of good faith requires directors to act with an honesty of purpose,
ensuring their actions are intended to benefit the corporation and are not motivated by an
intent to cause harm. The duty of loyalty mandates that directors act in the best interests of
the corporation and its shareholders, avoiding conflicts of interest and self-dealing. The duty
of care requires directors to act with the care expected of a reasonably prudent person in
similar circumstances. This involves making informed decisions and considering all relevant
information before taking action.
,The landmark case of Smith v. Van Gorkom illustrates a breach of the duty of care, where
directors were found grossly negligent for approving a merger without adequate inquiry or
expert advice. This case highlighted the importance of due diligence in decision-making
processes. The business judgment rule protects directors from liability for decisions that
result in loss or damage, provided they acted in good faith, with due care, and in the best
interests of the company. This rule acknowledges that business decisions often involve risks
and uncertainties, and courts generally avoid second-guessing these decisions unless there
is evidence of gross negligence, fraud, or self-dealing.
The case of Dodge v. Ford Motor Co. is another significant example, where the court
emphasized that a corporation is primarily organized for the profit of its shareholders.
Directors must prioritize profit-making, although charitable contributions are permissible as
long as they remain secondary to this main objective. Henry Ford's attempt to reinvest profits
into the company to benefit employees and the broader community was challenged by
minority shareholders, leading to a ruling that reinforced the profit-centric nature of
corporations.
Directors' Duties in Europe
European jurisdictions approach directors' duties with both shareholder-oriented and
stakeholder-oriented perspectives. In the UK, directors are required to promote the success
of the company for the benefit of its members as a whole, while also considering the
interests of employees, business relationships, the community, and the environment. This
broader perspective reflects a stakeholder-oriented approach, recognizing the importance of
various parties affected by corporate actions.
The duty of care in Europe varies by jurisdiction but generally involves making well-informed
decisions and avoiding conflicts of interest. The UK's Companies Act 2006, section 174,
mandates that directors exercise reasonable care, skill, and diligence. This standard is both
objective and subjective, considering what is reasonably expected of a director and the
actual knowledge and experience of the individual director.
Director liability in Europe generally starts with the principle that directors are not personally
liable for the company's actions unless specific legal conditions are met. Shareholder
derivative suits allow shareholders to sue on behalf of the corporation if directors fail to act in
the corporation's best interest, providing a mechanism for accountability and redress.
Trends in Directors' Duties
The role of corporations is evolving to include meeting the needs of a broader set of
stakeholders. This shift reflects an increasing emphasis on social value, long-term
sustainability, and environmental, social, and governance (ESG) criteria. The traditional
shareholder-oriented approach is giving way to a more stakeholder-oriented perspective,
acknowledging the broader impact of corporate actions on society and the environment.
These notes provide a comprehensive overview of the key concepts and duties associated
with corporate governance, highlighting important cases and evolving trends. By
understanding these principles, one can appreciate the complexities and responsibilities
involved in managing and directing a corporation.
, Important Terms Explained
- Fiduciary: A person who has a duty to act primarily for another's benefit in matters
connected with an undertaking.
- Gross Negligence: A severe lack of care that constitutes a reckless disregard for the
safety or lives of others, which is more severe than simple negligence.
- Derivative Suit: A lawsuit brought by a shareholder on behalf of a corporation against
a third party, often an insider of the corporation.
- Business Judgment Rule: A legal principle that protects directors of a corporation
from liability for decisions that result in loss or damage if the decisions were made in
good faith, with the care that a reasonably prudent person would use, and with the
belief that they were acting in the best interests of the company.
Norman & Anor v. Theodor Goddard & Ors (quick third party), [1992] B.C.C. 14; [1991]
B.C.L.C.1027
Case Summary
The case of Norman & Anor v. Theodor Goddard & Ors ([1992] B.C.C. 14; [1991]
B.C.L.C.1027) centers on the standard of duty of care expected of directors under the law of
England and Wales. This case provides significant insights into how courts interpret and
apply the duty of care required from directors, highlighting the distinction between the
objective and subjective standards used in evaluating directors' conduct.
Objective vs. Subjective Standards
Under the law of England and Wales, the duty of care for directors is outlined in the
Companies Act 2006, specifically in section 174. This section mandates that directors must
exercise reasonable care, skill, and diligence. The interpretation of this duty involves a dual
standard: objective and subjective.
The objective standard requires that a director's actions be measured against what would be
reasonably expected of a person carrying out the same functions in relation to the company.
This standard provides a baseline level of care that must be met, regardless of the individual
director's personal experience or qualifications. Essentially, it considers what a reasonably
diligent person with general knowledge, skill, and experience would do in similar
circumstances.
Conversely, the subjective standard considers the director's actual knowledge, skill, and
experience. This means that if a director possesses specific expertise or professional
qualifications, they are expected to apply this higher level of skill in their duties. The
subjective standard, therefore, raises the bar for directors who have particular skills or
knowledge, requiring them to use their personal expertise in addition to meeting the general
standard expected of all directors.
Application in Norman & Anor v. Theodor Goddard & Ors
In Norman & Anor v. Theodor Goddard & Ors, the court had to determine whether the
directors had breached their duty of care. The case emphasized the importance of this dual
standard. Lord Hoffmann articulated that a director need not exhibit a greater degree of skill
than what may reasonably be expected from a person undertaking the same duties.
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