University of Roehampton: Law of Business Enterprises, Autumn 2019

This essay analyzes the relationship between shareholders and directors within the context of business law, specifically focusing on the dynamics of control and the fulfillment of duties. The essay begins by presenting a case scenario adapted from Berle and Means' work, highlighting the separation of ownership and control in limited companies and the reliance of shareholders on the board of directors. It then explores the means by which shareholders can exert supervisory powers over the board, emphasizing the significance of the Companies Act 2006, and the duties of directors under sections 171 (duty to act within powers), 172 (duty to promote the success of the company), and 174 (duty to exercise reasonable care, skill, and diligence). The essay further examines how these statutory duties assist shareholders in their exercise of power and control within a company. The assignment also incorporates relevant case laws, like Coleman v Myers and Percival v Wright, to illustrate the legal principles involved. The essay concludes with a summary of the key points and a final assessment of the relative roles and responsibilities of shareholders and directors in corporate governance, emphasizing the importance of adhering to the law for the welfare of the organization and its members. This assignment is available on Desklib, a platform offering AI-powered study tools.

Law in Business
Enterprises

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Case Scenario..............................................................................................................................1
The means by which shareholders seek to exercise supervisory powers or control over a board
of directors..................................................................................................................................1
To what extent the contents of directors’ duties under SS 171, 172 and 174 CA 2006 and their
enforcement assist shareholders in this exercise of power and control......................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Law of Business Enterprises can be defined as the process which tells that how any of the
business organisation is required to perform their business activity. It becomes important that law
must be followed by the organisation and if in any of the situation they fails then legal action are
to be taken by the authorised party. This file will based on the shareholders and directors who
both plays the most crucial role within the business organisation in order to accomplish the goals
and target. Secondly, duties and power of directors will be discussed as per the section 171, 172
and 174 of Companies Act 2006.
MAIN BODY
Case Scenario
“In their work “The Modern Corporation and Private Property” (1932), Berle and Means
indicated that where the ownership and control in a limited company is separated, the owners
(shareholders) rely on the board of directors to represent their interests. They further stated that
over time the supervisory role of the shareholders becomes ineffective and directors always have
the final say”.
The means by which shareholders seek to exercise supervisory powers or control over a board of
directors
It is needed to be understand that Shareholders are the one who plays the crucial role with
the business organisation as they are the one who tells that how director is needed to perform
within the business organisation. In any of the company, shareholders are the one who invest
their capital which means they have the power that how any of the work is needed to be done.
But, the first concept which is needed to be understand is that owner (shareholders) and
organisation is always separate from each other where both shareholders and directors are
needed to perform their duties.
Although, Board of Directors perform most of the task in any of the organisation but still
it very important to make clear that company must perform the work as per the instruction given
by the shareholders1. The main reason to understand that directors are needed to perform any of
the work as per the shareholder is that shareholders are the one whose money is invested in the
organisation so they are the one who will try to find the exact way that how company can earn
1 'Shareholder Ratification Of Directors' Fraudulent Acts' (2015) 53 Harvard Law Review.
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the profit. Talking about the directors, they perform their task very well but still it is the
responsibility of director to work according to the instruction because they are also counted as
the employees of the organisation. Secondly, if any of the decision in the organisation are taken
by the mutual decision of shareholders is never counted as wrong or invalid but if in any of the
circumstance Board of Directors take their decision of own where they doesn't have the power
that in that particular situation directors will be held liable.
As per the Companies Act 2006, any of the director can be removed from the business
organisation by passing the ordinary resolution but it cannot be done in any of the situation that
board of directors are taking the decision to remove any of the shareholder as they are interim
part of the organisation2. Shareholders are the one who owns the company but directors are just
needed to manage the company on the basis of instruction given by the shareholders. To
understand about director and shareholder, detail information is mentioned in the table.
Shareholders Directors
They are the one who work on the basis of
profit in the organisation.
They are the one who is required to work on
the basis of salary being provided by the
shareholders.
Their power is always decided on the basis of
percentage of share within the organisation.
Rights and power are always determined by the
shareholders of the company.
It is the responsibility of shareholders to form
the company as per the guidelines of
Companies Act 2006.
They have the responsibility to perform any of
the work as per the guidelines given by the
shareholders of the company.
Some of the famous cases related to shareholders and directors
Coleman v Myers is one of the famous case law where it was important for the business
organisation to understand that it is the duty of director to perform their work as per the
guidelines prepared in Article of Association. Here, Mayers didn't want to perform any of the
work as per the guidelines of shareholders on which court declared that it is necessary for all of
2 Thomas Poulsen, Therese Strand and Steen Thomsen, 'Voting Power And Shareholder
Activism: A Study Of Swedish Shareholder Meetings' (2010) 18 Corporate Governance: An
International Review.
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the directors to understand that they must perform according to the law and legislation. In
addition it is crucial for Mayer to inform all of the activity to Coleman as he was one of the
active shareholder of the organisation.
Percival v Wright is the case which simply says that directors who are the important part
of the company must be able to work according to the instruction of directors. It is crucial for
directors to understand that they are the employees of the company where as shareholders are the
owner of the organisation3.
Above mentioned are some of the cases which simply explains that how any of the work
is needed to be done. Even it states that directors are allowed to do only those work which are
given by the shareholder which clearly gives indication that shareholder plays the crucial role.
As per the statutory and common law, in any of the business organisation directors
always plays the crucial role as they manage most of the work so that goals can be accomplished.
But, the duty which is being given to directors is always of shareholders which means that
directors are needed to perform their task as per the instructions of shareholders. Secondly, the
money in the organisation is invested by the shareholder which gives them the power to know
each and every activity performed by the organisation but directors doesn't have the right to ask
any of the question with shareholders. In short, the given case scenario, is not appropriate
because shareholders interest never decreases in any of the situation. Also, directors are needed
to follow the instruction of shareholders.
To what extent the contents of directors’ duties under SS 171, 172 and 174 CA 2006 and their
enforcement assist shareholders in this exercise of power and control
In any of the company certain rules and regulations have been formed which clearly
indicates that how any of the directors is required to work within the organisation. If in any of
the situation, directors doesn't comply with the rules and regulation then legal actions can be
taken upon them which can create huge problem for the business organisation. Below, different
sections have been discussed under which duties of directors have been discussed in detail.
Section 171 Duty to act within powers
It is the section which discusses about the duty of director and even it simply explains
that any of the director has the responsibility to perform any of the work as per the constitution
3 Brenda Hannigan, Company Law (Oxford University Press 2012).
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of a company4. Also, it is required for directors that they should only perform those work where
they have been given power and in any of the situation they will not perform the work where
they are not allowed to take any of the decision.
Section 172 (Duty to promote the success of the company)
It is one of the section which simply explains about the roles and responsibility of the
directors that whenever any of the directors are appointed within the organisation they are
needed to understand that they must work on good faith and even they will try to perform each
and every work through which company will be able to earn the profit which can be enjoyed by
the employees and the member of the organisation. In addition, some of the points which are
needed to be considered while taking any of the decision
 they will try to find out the consequences of any of the decision which are taken for long
term.
 It must be for the welfare of employees and relation should be improved with customers,
suppliers and other person connected with the organisation5.
 Any of the decision of the company must not affect the environment and community.
 They must work fairly for member as well as for the organisation.
Section 172(2) simply says that in any of the situation, the motive of company should be
for the benefit of employees as well as for the members of the organisation.
Section 172(3) says that duty imposed by this particular section has effect subject to any
lawmaking or rule of law requiring directors perform the work for the benefit of employees.
Section 174 Duty to exercise reasonable care, skill and diligence
It is the responsibility of the director of a company to perform any of the task with
reasonable care, skill and diligence. In simple words, directors should use their knowledge and
skills while taking any of the decision so that organisation goals can be accomplished within the
given time period.
All of this section clearly indicates that any of the director of the organisation is required
to perform any of the task as per the requirement of Article of Association. It is also needed to be
4 Companies Act, 2006
5 Sally Ann Burrows, 'Directors' Duties (1St Edition)20102Andrew Keay. Directors'
Duties (1St Edition). Jordan Publishing Limited, 2009. 476Pp.' (2010) 52 International Journal of
Law and Management.
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understand that in any of the situation Shareholders prepare the Article of Association which
indicates that what are the power which is being delegated to the directors of the company. The
section 172 explains that whenever any of the director take any of the decision, it must be on the
basis of power delegated to them and even it should be for the welfare of employees and member
of the company who has the crucial role within the business organisation.
Thirdly, it is necessary for director that they must not any of those decision where are not
confidence because single mistake can create lots of problem for firm as well as members of the
organisation who plays the active part within the organisation6. This sections says that although
directors have to perform lots of work in the organisation but still they are needed to report the
member of organisation that what they are going to do and how they going to do. In any of the
situation the power which has been delegated to the directors will always explain that
shareholder will be the key person of the organisation who cannot be separated from the business
organisation in any of the situation and director will have to work according to the order given
by shareholders.
CONCLUSION
From the above file, it can be easily concluded that law for business enterprises has been
framed in a systematic manner where it has expressed about the role and duty of any of the
shareholder as well as directors. Shareholder do not take the part in most of the business activity
but still, it is needed to be understand that directors are needed to perform any of the work as per
the requirement of shareholders as their capital has been invested in the organisation. In any of
the situation it becomes important for the director of the company that while taking any of the
decision it must be for the welfare of organisation or even it is necessary that skills and
knowledge must be used while taking the decision.
6 Census Oversight Efficiency And Management Reform Act Of 2010 (US GPO 2010).
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REFERENCES
Books & Journals
'Shareholder Ratification Of Directors' Fraudulent Acts' (2015) 53 Harvard Law Review
Burrows S, 'Directors' Duties (1St Edition)20102Andrew Keay. Directors' Duties (1St Edition).
Jordan Publishing Limited, 2009. 476Pp.' (2010) 52 International Journal of Law and
Management
Census Oversight Efficiency And Management Reform Act Of 2010 (US GPO 2010)
Hannigan B, Company Law (Oxford University Press 2012)
Poulsen T, T StrandS Thomsen, 'Voting Power And Shareholder Activism: A Study Of Swedish
Shareholder Meetings' (2010) 18 Corporate Governance: An International Review
Online
Companies Act 2006. [Online] Available Through:
<http://www.legislation.gov.uk/ukpga/2006/46/section/171>
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