Shareholder Supremacy in Classical Company Law — With Particular Reference to the Making of Business Decisions by Shareholders on Behalf of their Company

Shareholder supremacy is under attack from many academics around the world. For just one recent example, see Beate Sjåfjell's ‘Dismantling the Legal Myth of Shareholder Primacy: The Corporation as a Sustainable Market Actor’. One need not deny that externalities caused by the operations of large businesses are a problem that needs attending to, in order to attack the attempt to socialise the corporate form which is being advocated by many academics and others from the Corporate Social Responsibility movement. Many of these advocates have no time at all for capitalism, and little confidence that democracy can deliver the change necessary for environmental and social sustainability. Taken at face value, attempts to impose legal obligations on corporate managers to abandon shareholder supremacy will involve courts and judges reviewing business decisions. Is the company putting enough resources into reducing packaging, etc? This will require more public money put into judicial appointments and court time, because under the orthodox model of shareholder supremacy there is no judicial review of management, even at the behest of shareholders! Under the orthodox model, if managers want to act in a way that is environmentally sustainable then they may, but shareholders who disagree can remove them. Under the orthodox model there is no duty to profit maximise.

But under the model that removes shareholder supremacy, judges will find themselves involved in non-justiciable decision-making, looking over the shoulders of corporate managers. More worryingly, some judges will actually enjoy their new-found powers. But perhaps what advocates of this revolution in directors’ duties are really hoping for is to use the law to bring about a change in managers’ mind-sets, in the way that human rights law has been used to change attitudes to sexual, racial and other forms of anti-social discrimination. It is true that, so long as the amount of legal intervention is modest and the penalties are modest, there is something to be said for using the law as an instrument of social change, but there are real dangers too. There are other ways of changing attitudes, and asking the law to do too much has its perils. It certainly has costs, financial and social (as current political backlashes around the world are demonstrating).

In a new article, I look at a recent New Zealand case on the role of shareholders in the management of companies, focusing on small companies, which make up the vast majority of the Western world’s business operations. I find that it is not only in the interests of shareholders, but also in the interests of parties dealing with companies to continue to take the view that if shareholders have approved of something in a solvent company it is legally effective.

The abstract of my article follows:

'The premises of classical company law are those of capitalism. Subject to a range of restrictions on withdrawing capital, the rules vest ultimate control of the business in those who provided the equity for the business, the shareholders. But only all the shareholders acting unanimously have complete authority and discretion in relation to the company’s affairs. This is in recognition of the fact that shareholders’ personal interests are not always aligned and some measure of protection of minorities is inferred. Consistently with these premises, shareholders can, if they wish, through the constitution confer management power on themselves in respect of classes of decision or even in relation to a single matter, ad hoc. Shareholders acting unanimously can achieve the same end more informally. Some doubt was cast on the last of these propositions in the litigation that ended in New Zealand’s top court in Ririnui v Landcorp Farming Ltd (2016). In fact, only one judge of five in the Supreme Court addressed the company law issues, but the judges of the Court of Appeal below also expressed doubts. This article argues that these judges were wrong to have these doubts, whether they purported to be founded on classical company law or changes to that law effected by the Companies Act 1993 (NZ). As to the pre-1993 Act law, both the facts and reasoning in Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame (1906) are consistent with the view that shareholders (by supermajority formally, and unanimity informally) can take business decisions for their company over the heads of the board of directors.'

This post is an update to a previous contribution to the Oxford Business Law Blog available here.

Peter Watts is currently the Leverhulme Visiting Professor at the University of Oxford, and a Professor of Law at the University of Auckland.