Report on Legal Aspects of Business: Director's Duties and Powers

This report delves into the legal aspects of business, focusing on the duties of company directors as outlined in the Companies Act 2006. It emphasizes the importance of directors acting within the powers conferred upon them by the company's constitution and exercising these powers for their intended purposes. The report discusses scenarios related to share issuance and dividend recommendations, illustrating potential conflicts and legal challenges. A case study involving Buyer Co. and Target Co. highlights the complexities of power dynamics and the potential for directors to breach their duties by prioritizing the interests of certain shareholders over others. The analysis underscores the significance of legal compliance in corporate governance and the need for directors to make decisions that are both legally sound and aligned with the best interests of the company and its stakeholders. The conclusion summarizes the key findings, reinforcing the importance of legal frameworks in guiding director actions and ensuring responsible business practices.

Legal Aspect of
Business

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Duty to act within power.............................................................................................................3
Case discussion............................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Legal aspect for a business is an indispensable element. Businesses are required to
function according to law and regulations. This is important to ensure success of business in
legitimate form. This report will discuss duties of a director of a company to act within powers.
This will be discussed according to Companies Act, 2006.
MAIN BODY
Duty to act within power
According to section 171 of Companies Act 2006 a director of a company is required to-
Act according to the constitution of the company
This duty of directors involves that directors are required to act according to the articles
and constitution of the company (Wijerathna, Kunhibava and Balan, 2018). This is the block
within which directors are required to act and they cannot act something which is not covered
and included in the articles and constitution.
Duty to exercise power for the purposes for which they are conferred
This is another duty of the director that they can and must use their power for the purpose
for which they were given the power. This means that powers which are given to directors are
given with specific purposes and this is why powers should be exercised for those purposes.
Unless and otherwise exercising of power will be illegal for the directors even if they are given
to the director.
The duty applies to variety of power of directors and this includes power to issues shares, power
to recommend dividend and the power to refuse transfer of share in register. This will apply to
any powers which are conferred on the directors by the shareholders through the article and to
some of them powers conferred to them by the statute. But there is no list to assist directors with
the determination of purpose for which a particular power has been granted to them (Lim, 2017).
This make it difficult for the directors to decide whether a proposed exercise of power may
constitute a breach of duty. Some of the scenarios relevant to this is are;

Case discussion
This case involves Buyer co. and Target Co. and acquisition of Target co by Buyer co in
a ratio of 60% and 40%. In this 60% of the stake of Target co gets acquired by Buyer Co and
remaining 40% stake is in hand hands of several small shareholders. Later this case involves
exercise of powers of the directors of the Target Co and Buyer Co in which they face difficulty
in determination of what is the purpose of powers which has been conferred to them.
Scenario 1
This scenario states that Target Co’s affairs are running smoothly but after a year difference of
the opinion arise in context of where the company should be heading between Buyer Co and
minority shareholders. Buyer Co take decision to replace the board of the company and to
appoint new directors. The directors proceed to issue Buyer Co with shares to take its holding
above 75%, this effectively give power to Buyer Co. to control Target Co.
This situation involves that newly appointed directors might consider that they can dilute the
power of minority shareholders by acquiring higher stake in the company (Keay, 2016). But this
comes with a legal difficulty because the main purpose for which directors are given the power
to exercise their right to issues shares is to raise the capital of the company. This can also be look
suspicious by the court the allotment which has been designed to weaken the position of the
minority shareholders.
This case reflects the difficulty about what is the actual purpose of a share allotment
where directors can exercise their power to allot shares for purpose of increasing the capital of
the company. The above scenario suggests that directors exercised their power to dilute and
affect the power of minority shareholders.
Scenario 2
This scenario involves that Target Co’s board includes some of the directors who were in the
board before the acquisition of the Target Co by Buyer Co. Later majority of the board members
and directors were appointed by the Buyer Co. followed by the acquisition. Buyer co.’s nominee
uses their power which has been given to them by the articles. This power is power to
recommend dividend, despite the fact that Target Co. is extremely profitable and they can give

high dividend directors and nominee of the Buyer Co (Tsagas, 2017). consistently recommended
low dividend. In this recommendation for low is reflection of the directors act according to the
wish of Buyer Co. by giving low dividend buyer Co. is willing to create the fund for future
acquisition. But by this approach minority shareholders are unhappy and they are willing to
immediate benefits in terms of higher dividend given to them. This situation might not deal with
court and legal proceedings and this might seem legitimate in terms of long-term strategy of the
company. But as lacking any immediate plan for acquisition by the company, minority
shareholders of the company can fully entitled to participate in the present success of the
company. This means that as presently there is no plan and possibility for the acquisition in such
case company can give higher dividend to minority shareholders. This also raises questions for
the exercise of powers by the directors as they are recommending low dividend even when
profitability of the company is high. This clearly indicates that they are not exercising their right
properly (Dotevall, 2016). In this situation there is a difficulty that directors are not giving
recommendation for adequate dividend in their power but as they are looking for future success
they can also not be held liable for not exercising their power according to purpose for which
they has been conferred to them.
CONCLUSION
On the basis of above it can be concluded that in context of company and business all the
functions and activities are governed by law. This law also govern and guide act and decision of
the directors. Regarding this it is important that directors act in the limits of company’s
constitution and also exercise power according to its purpose.

REFERENCES
Books and Journals
Dotevall, R., 2016. Is a Common Structure of Company Directors' Duties Evolving in EU. Eur.
Bus. L. Rev.. 27. p.285.
Keay, A., 2016. Assessing and rethinking the statutory scheme for derivative actions under the
Companies Act 2006. Journal of Corporate Law Studies. 16(1). pp.39-68.
Lim, E., 2017. Judicial Intervention in Directors’ Decision-Making Process: Section 172 of the
Companies Act 2006. Journal of Business Law. 169. p.2018.
Tsagas, G., 2017. Section 172 of the Companies Act 2006: Desperate times call for soft law
measures. Draft Paper for contribution: Tsagas, G.
Wijerathna, Y., Kunhibava, S. and Balan, S., 2018. Evaluating the Relevancy of the Directors’
Duty to Exercise Powers for a Proper Purpose. Journal of Malaysian and Comparative
Law. 45(2). pp.1-24.