Common Law and directors’ duties

Does the law provide either an adequate mechanism for the enforcement of Directors’ Duties in the Common Law Courts or an adequate means for protection of minority shareholders?

According to Chivers (2007) as well as Dunne and Sayers (2009), in the organization especially the commercial organization, the law may not only act as the mechanism to enforce the directors to carry out their duties and responsibilities but also work as a protective means for the minority shareholders to protect their interest. In the following, we’ll have a discussion on the relationship between the law and directors’ duties as well as the law and the benefit of shareholders.

Law and directors’ duties

In fact, the duties and responsibilities are often originated from these legal related sources including the common law, company act, statues, the rules and regulations from the regulatory body and so on (Chivers2007; Dunne & Sayers 2009). And according to Trevino and Nelson (2007) as well as Chivers (2007), the directors’ duties are often made up of fiduciary duty, duty in dealing with conflicts of interest, duty of care as well as these statutory duties.

Let’s have a look at the duties of directors enforced by the law in the following.

) Fiduciary duty

To begin with, the law, especially the common law provides the mechanism to impel company directors to carry out their fiduciary duty. Almost every director is bound to the common law via the fiduciary duty to the firm or organization. The common law injects two roles for directors to act so as to fulfill their fiduciary duties including the representative of the company and the trustee to take charge the assets of the company. Under the guidance and press from the law, company directors have to fulfill a series of responsibilities to their company. The first one is to work and act in the good faith to their company (Crago 1996). The second one is to work and only work for the entire benefit of the whole company within their directors’ power. The third is to avoid any personal interest gain via taking advantage of the directors’ power and authorities. In another word, the law enforces the directors to work and act towards the company’s interest rather than the personal interest, especially when there is a conflict between the two. (Dalphond 2001)

) Conflicts of interest

Besides the above mentioned the duties to solve conflicts of interests between personal and company, the law also enforces directors to deal with the interests conflicts among these subsidiary companies. For example, the law requires the directors to balance the interests of these subsidiary companies properly under the guidance to maximize the value of shareholders and minimize the side effects. Or else, the directors may consider resigning from this position. (Welling 2001)

Duty of care

The duty of care forced by the law especially the common law requires company directors to pursue the benefits and interests of these shareholders properly and smartly ( Schipani & Liu 2007 ). Let’s take the scenario that there is an attractive offer to the directors of the board on the sale of the company. Although this offer is so compelling and beneficial for the future interests of the shareholders, the potential sale of the company may lead the directors to face the lawsuit. In the situation, the law enforces and compels company directors to operate the company under the guidance of the law to care the whole situation of the company. And at the same time, the law also rules some of the action of the company directed by the directors to correct their directions so as to act more appropriately to fulfill the duty of care. (Dalphond 2001)

) Statutory duties

Besides the above duties, company directors should also comply with these responsibilities and obligations required by the company act.

For instance, these memorandums of association and the company law or act define the dimension of the objectives and scope of the business which requires the directors and the whole company to understand and follow the direction due to the duties imposed by them to the directors (Welling 2001; Schipani & Liu 2007).

Decision making authority

Under the guide of the company act, directors of the company often represent a certain kind of power and it’s the duty of them to transfer some of the power to managers via imposing some proper rules and principles to restrict them. Meanwhile, the company law also enforces directors to bear with the duty to evaluate the performance of managers in order to make sure that these works done by managers are in the range of their delegated power. (Schipani & Liu 2007)

Other duties

The law also provides the proper mechanism to enforce directors to fulfill the duties. For example, it’s the obligations of company directors to monitor the accounting situations via the assistance of accountants. And then, it is also the duty directors enforced by the company law to claim reimbursement if expenses occurs. Meanwhile, directors are also responsible to take part in the strategic management of their organization and the board meeting and so on. (Welling 2001 )

In the financial aspect, directors should also be responsible to the company for the financial losses due to their false resulting from the actions outside the dimension of their authority or power (Dalphond 2001).

By and large, from the above discussion and analysis, we can get that the law does offer the mechanism for the enforcement of the directors’ duties in the common law court. But whether it is effectively and proper enough may differ a lot in different countries. In the developed countries, due to the relatively complete legal system and higher education level of the citizens, the content of the law and enforcement may be better than these less developed countries, which indicates that in these developed countries the law may offer much proper mechanism for the enforcement of the directors’ duties in the common law court (Trevino & Nelson 2007)

Reference

Airaksinen, M. 2006, Enforcement of minority shareholders’ rights, OECD/ World Bank Corporate Governance Roundtable for Russia, Moscow, p.24-25,

Chivers, D. 2007, The Companies Act 2006: Directors’ duties guidance, electronic version, Corporate Responsibility (CORE) Coalition, n.p.,

Crago, D. C. 1996, Fiduciary Duties and Reasonable Expectations: Cash-out Mergers in Close Corporations, Business Review, Okla.,

Dalphond, p. J. 2001, Shareholder Remedies and Directors’ Liability in Quebec Corporate Law, National Judicial Institute, Vancouver,

Dunne, M. & Sayers 2009, Directors’ responsibilities, 7th edn, BHP Information Solution Ltd, vol. sw17, London,

He, W. n.d., Improving the protection of minority shareholders in Chinese company law, electronic version, McGill, Beijing, viewed 11 August 2011,

Schipani, C. A. & Liu, J. 2007, Corporate governance in China: Then and now, Columbia Business Law Review, vol.1.

Song, H.S. 2000, The minority shareholders’ Rights and the Protection by the Company Law, Journal of Social Science, vol.13, no.,

Trevino, L. K. & Nelson, K. A. 2007, Managing business ethics: Straight talk about how to do it right, John Wiley & Sons, Inc., New Jersey,

Reese, W. A. & Weisbach, M. S. 2002, Protection of minority shareholder interests, cross-listing in the United States and Subsequent equity offerings, electronic version, National Bureau of Economic Research, viewed 11 August 2011,

Welling, B. 2001, Canadian Corporate Law Cases, 2nd edn Notes & Materials, Toronto,

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