The duties of directors in the face of activism

• Jurisdiction: South Africa
• Author: Nigel Boardman
• Date: 16 August 2019
• Published date: 16 August 2019
• Pages: 1-23
• Citation: (2016) 2(2) JCCL&P 1

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THE DUTIES OF DIRECTORS

IN THE FACE OF ACTIVISM

NIGEL BOARDMAN

Partner, Slaughter and May, London

EMILY RAFTOS

Associate (M&A), Slaughter and May, London

ABSTRACT

In recent years, activism has become one of the most widely discussed

topics in corporate governance. Much of this discussion centres on

the manner in which target companies should respond to activists.

Here, opinion is divided: some commentators consider that activists

enhance value and that therefore they should be encouraged, while

other commentators consider that activists enhance short-term value

at the expense of long-term value and that therefore they should be

discouraged. At the heart of this debate is an important question

regarding the duties of directors: is it the duty of directors to promote

the long-term interests of the company over the short-term interests

of the company?

This article will consider this question. It will be argued that, as a

matter of English law, the answer is ‘no’: in discharging their duties,

directors are required to consider the long-term interests of the

company, but are not necessarily required to promote such interests

over short-term interests.

Key terms: directors, interests of the company, activism shareholders

I INTRODUCTION

This article proceeds as follows: Part II gives an overview of the

debate about the manner in which target companies should respond

to activists. Part III explores the duty of directors to promote the

success of the company under s 172(1) of the Companies Act of 2006

(the English Companies Act), arguing that recent interpretations of

s 172(1) overstate the significance that directors must place on the

long-term interests of the company. Part IV adopts a comparative

approach, considering the comparable duties in each of South Africa

and Australia and the similarities and differences between the three

regimes. Part V concludes the article.

(2016) 2(2) JCCL&P 1

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(2016) 2 (2) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

II OVERVIEW OF DEBATE ABOUT ACTIVISTS

Much of the discussion about activism centres on the manner in

which target companies should respond to activists. Here, opinion

is divided: some commentators consider that activists enhance

value and that therefore they should be encouraged, while other

commentators consider that activists enhance short-term value at

the expense of long-term value and that therefore they should be

discouraged.

Recently, this debate has been reignited in the United States

of America (the US), where media reports suggest that companies

have been increasing capital returns and cutting R&D spending. For

example:

• The Wall Street Journal has reported that in the period between

2003 and 2013 companies in the S&P 500 Index increased their

spending on dividends and buybacks to a median 36 per cent of

operating cash flow in 2013 from 18 per cent in 2003, and cut

spending on plants and equipment to 29 per cent of operating

cash flow in 2013 from 33 per cent in 2003.1 The Wall Street Journal

has also reported that at the 400 non-financial companies in the

US that Moody’s rates as investment grade, the median percentage

of cash spent on dividends rose to 11.9 per cent of EBITDA2 in the

third quarter of 2014 from 9.4 per cent in 2013.3

• CNBC has reported that buybacks by companies in the S&P 500

Index totalled US$572.2 billion in 2015 (a 3.3 per cent increase

from 2014) and that statements accompanying first-quarter

earnings indicated corporations were preparing to buy a total of

US$600 billion in their own shares in 2016.4

• Reuters has reported that among the 1,900 companies that have

bought back their shares since 2010, buybacks and dividends

amounted to 113 per cent of their capital spending (compared to

60 per cent in 2000 and 38 per cent in 1990), and that among the

1,000 firms that buy back shares and report R&D spending, the

proportion of net income spent on innovation has averaged less

1 V Monga, D Benoit & T Francis ‘As activism rises, US firms spend more on

buybacks than factories’ The Wall Street Journal 26 May 2015, available at http://

www.wsj.com/articles/companies-send-more-cash-back-to-shareholders-1432693805,

accessed on 13 December 2016.

2 Earnings before interest, tax, depreciation and amortization.

3 Monga, Benoit & Francis op cit note 1.

4 J Cox ‘Companies are planning to spend $600 billion on this losing strategy’

CNBC 13 May 2016, available at http://www.cnbc.com/2016/05/13/s-and-p-500-

ompanies-are-planning-to-spend-600-billion-on-share-buybacks.html, accessed on

13 December 2016.

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