Supervision of the use of corporate power as the ultimate purpose of directorial duties and the advisability of corporate law enforcement in the public interest

• Jurisdiction: South Africa
• Date: 16 August 2019
• Published date: 16 August 2019
• Author: Tshepo H Mongalo
• Pages: 17-48

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SUPERVISION OF THE USE

OF CORPORATE POWER AS

THE ULTIMATE PURPOSE OF

DIRECTORIAL DUTIES AND THE

ADVISABILITY OF CORPORATE LAW

ENFORCEMENT IN THE PUBLIC

INTEREST*

TSHEPO H MONGALO†

Senior Law Academic and Head of Law Department at

Monash South Africa

ABSTRACT

In the aftermath of thedevastating global financial crisis in the latter

part of the first decade of the 21st century, a question that begs for an

answer is whether a different corporate legal enforcement framework

aimed at mitigating the effects of aggressive directorial pursuit of

profits to satisfy the short-term interests of shareholders would have

helped in minimising the effects of the crisis, at least in key Anglo-

American jurisdictions.

Using lessons from South Africa and Canada, this article questions

whether the regulatory responses to the financial and economic

crises adequately recognises the threat that reckless management

poses to the broadly defined legal interests of corporate entities. The

acceptance of the true purpose of directorial duties – the indisputable

source of corporate legal interests – may justify a departure from

the conventional Anglo-American shareholder-oriented corporate

legal enforcement framework, which still limits the right of action

to protect the legal interests of companies to shareholders. The

preservation of the conventional corporate legal enforcement

framework, particularly in jurisdictions that bore the brunt of the

global financial crisis (that is, the United Kingdom and the United

* This article is based on my unpublished PhD thesis, Corporate Actions and the

Empowerment of Non-shareholder Constituencies (University of Cape Town, 2015)

supervised by Judge Dennis Davis.

† BProc (Summa cum Laude), LLB (Natal); LLM (Cambridge); PhD (Cape Town).

(2017) 3(1) JCCL&P 17

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18 (2017) 3 (1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

States), isnotwithstanding the institutionalisation of the ‘enlightened

shareholder value approach’ (ESVA).

The original jurisprudential justifications for the conventional

shareholder-oriented corporate legal enforcement frameworkare no

longer justifiable, particularly in the context of public companies,

where the argument for the protection of broader interests is more

compelling.Since, in that context, the purpose of directorial duties

as the exclusive protection of shareholder interests can no longer

be sustained, policy makers should accept that the supervision of

the use of corporate power to minimise or eradicate the potential

for directorial self-serving conduct is the ultimate purpose of such

duties. The article concludes that existing corporate law rules already

address the potential for floodgates of litigation and the alleged lack

of practical means of a broadly inclusive enforcement framework.

I INTRODUCTION

The recent developments in both the United Kingdom (the UK)

and the United States (the US) in institutionalising the ‘enlightened

shareholder value approach’ have not led to the concomitant reform

of the corporate legal enforcement framework to empower the non-

shareholder corporate constituencies envisaged under the approach

to access corporate law remedies.1 In fact, both the UK Companies

Act and the US Model Business Corporation Act – the two primary

sources of regulation of corporations in the respective jurisdictions –

1 In the United Kingdom, the institutionalisation of the enlightened shareholder

value approach is signified by the provisions of s 172 of the Companies Act

2006 (c 46), which is entitled ‘Duty to promote the success of the company’

and provides in sub-s (1) that ‘(1) A director of a company must act in the way

he considers, in good faith, would be most likely to promote the success of the

company for the benefit of its members as a whole, and in doing so have regard

(amongst other matters) to— (a) the likely consequences of any decision in the

long term, (b) the interests of the company’s employees, (c) the need to foster the

company’s business relationships with suppliers, customers and others, (d) the

impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards

of business conduct, and (f) the need to act fairly as between members of the

company.’ In the case of the United States, ever since 1983, at least 29 states have

adopted corporate constituency statutes and others are rapidly adopting benefit

corporation statutes, both of which recognise the consideration of interests of

non-shareholder corporate constituents and of general and specific public benefit

objectives. A typical corporate constituency statute provides (as in the case of

Florida under Fla. Stat. Ann. § 607.0830(3)) that: ‘In discharging his or her duties,

a director may consider such factors as the director deems relevant, including the

long-term prospects and interests of the corporation and its shareholders, and the

social, economic, legal, or other effects of any action on the employees, suppliers,

customers of the corporation or its subsidiaries, the communities and society in

which the corporation or its subsidiaries operate, and the economy of the state

and the nation.’

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SUPERVISION OF THE USE OF CORPORATE POWER

continue to recognise shareholders as the only corporate constituent

group vested with the power to access remedies, particularly

derivative actions.2 The longstanding misconception concerns the

unquestioned right of shareholders to actively promote the interests

of the company where those acting on behalf of the company fail to

cause the entity to do it. This is lamentable in light of recent corporate

law developments recognising non-shareholder corporate constituent

groups as being interested in protecting corporate interests. Indeed,

the recognition of general or specific public benefit objectives under

benefit corporation statutes, for example, loudly calls for recognition

of right of action by non-shareholder corporate constituent groups

as they are the primary beneficiaries of public benefit objectives.

Writing in relation to the acceptance of specific and general benefit

objectives as constituting the best interests of corporations in

benefit corporation statutes, I observed in my thesis that ‘[w]hile it

is understandable that the law should reserve for shareholders the

right of action in relation to the enforcement of objectives aimed

at promoting shareholder value within the benefit corporation, it

defeats logic that almost all benefit corporation statutes continue to

empower only shareholders [of benefit corporations] with regard to

the enforcement of public benefit objectives, even when it is clear

that it is non-shareholder corporate constituencies who are the

primary, if not the only, beneficiaries of those objectives’.3

II THE ORIGINAL JUSTIFICATION FOR THE CORPORATE

LEGAL ENFORCEMENT FRAMEWORK TO PROTECT

CORPORATE INTERESTS

The corporate legal enforcement framework for the protection of

corporate interests is originally linked to directorial duties and the

readily assumed acceptance of who the rightful beneficiaries of those

2 In the case of the United Kingdom, see the Companies Act 2006, s 261(1), which

entitles only members of the company to institute derivative claims. As far as

the United States is concerned, the Model Business Corporation Act – adopted

by more than half of the states as their primary corporate statute – makes it clear

that the only person vested with legal standing to bring derivative proceedings

is ‘a shareholder [who] was a shareholder of the corporation at the time of the

act or omission complained of or [who] became a shareholder through transfer

by operation of law from one who was a shareholder at that time’. See Model

Business Corporation Act 2005, § 7.41(1).

3 TH Mongalo Corporate Actions and the Empowerment of Non-Shareholder

Constituencies (unpublished PhD thesis, University of Cape Town, 2015) 234.

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