Member Article

The new principle of "enlightened shareholder value"

With Watson Burton LLP Law Firm

1 October 2007 will usher in a new regime in the legal framework governing the duties owed to a company by its directors. The new law is set out in the Companies Act 2006 (“the Act”) which has consolidated and updated the law and is to introduce new concepts in the field of directors duties.

The most radical enactment is section 172 which introduces the so-called principle of “enlightened shareholder value”. A director must act in the way he thinks would most likely promote the success of the company for the benefit of its shareholders. This seems uncontroversial, but the Act goes further by listing factors to which a director must have regard when taking decisions. A director must have regard to (amongst other things):

• The long term consequences of any decision
• The interests of a company’s employees
• The effect of the company’s activities on the community and the environment
• The need to maintain a company’s reputation and standing
• The need to foster good relations with customers, suppliers and others
• The need to act reasonably as between the members of the company

Company directors need to consider how the introduction of section 172 is going to affect the day to day decisions they must take when exercising their functions as a director. Unfortunately there is no guidance within the Act as to the relative weight that must be given to each factor when taking decisions. Nor is there any guidance as to the extent to which directors need to record their thought-process in reaching a certain decision in the minutes of meetings. There is likely to be an increased use of documentary records to allow directors to prove that they have considered the statutory factors.

There is also the potential for activist shareholders to bring derivative claims under the relevant Act in which they may seek to allege that a director has not considered the relevant statutory duty in his decisions, for example on environmental matters. One share will be enough to give shareholder the right to bring such an action.

The government’s view is that the decisions directors take in the interests of the company, on strategy and business development, are best left to the good faith judgements of the directors themselves rather than being subject to the scrutiny of the courts. It has also pledged to issue plain language guidance for directors explaining what they must do to comply with the new duties.

Despite this directors are advised to consider the impact of the Act very carefully over the coming months in order that they be ready for the changes. The Act is bringing in new concepts in company law and directors need to ensure they are fully up to speed with the changes.

If you have any queries in relation to this article, please contact Paul Wigham at Watson Burton LLP at paul.wigham@watsonburton.com or telephone 0191 244 4444.

This was posted in Bdaily's Members' News section by Ruth Mitchell .