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DDeakin Research Online Research Online This is the published version (version of record) of: Esser, I. and du Plessis, JJ 2007, The stakeholder debate and directors' fiduciary duties, SA mercantile law journal, vol. 19, no. 3, pp. 346-362. Available from Deakin Research Online: http://hdl.handle.net/10536/DRO/DU:30007411 Reproduced with kind permission of the copyright owner. Copyright : ©2007, University of South Africa

The Stakeholder Debate and Directors '

Fiduciary Duties

Introduction

I ESSER

UII i I'e rsi 1.1' or SOli I h II./i"ico

.IJ DU PLESSIS

/) ('((kill Ullil '(' rsill', I llIslm/io

II is u!'- u,dl y said Ih<ll ,I U)lllpany is a k gal enlil y sep<lrale !"rolll il s

1ll<lIl<lge llll: 1I1 ,lIld ~ hareho ld e r' and Ih<ll Ihe hu s in e~~ alld alrair~ or a company

Illu !'-I hl' 1I1<1naged hy or ullder thL' tlil 'ec tion of il s hoartl . Thi ~ implies v<l ri()u ~

duties allli respollsihilitie!'- ror din:ctl lr',

/)irect(lJ'~' duti e~ tratiition<lll y illclude oneroll ~ liduci<lry dulie~ and

obliga tions o r care. !'-kill a III I dili gence in terms or the COlllm()n law, variou ~

st;llutory prnvi si()ns in Ihc COlllpanics Acl 61 or 197.:1 requiring cert<lin things

or tiirec tm!'- or prc ve lltillg IhclII fnllll dllillg ce rtain Ihings (~ee. eg. ss 22 1-227

and 2.14-246 or Ihe Acl) . and po~s ible duties imposed by Ihe articles Dr

assoc ialion or even separale agreemenl~ bel ween direclor~ and Iheir

cO lllpallie~, (Fm dec isions concerning Ihe duli es or direct()r~. sec, eg.

SYlllillg lOIl I ' I'relllri(( - ()os Fri l'lI i11 /loslJilaal lIedry/.i' (p/r ) l,tt! 20()5 (5) SA

55() (SCA) at 5(12: C\/wr,\'('('II(, Uti I' i-Kiosk 11111'/'11('1 ({lid III/iJ/'/I/(/lioll (PlY)

1,Id :WOO ( \) SA XO(l (C ') ;11 X 13- cl; /)11 I ' /I'ssis I ' fJhdl}S Il)l)5 (..J.) SA 165 (C) <It

I 7() : Sill(' 1 ( 'o llsl nll'lillll (S/I ) (1)1.1' ) Uti I ' IlI j('('I((s(,1I1 C 'C I l)XX (2) SA 5-1 en at

(14: ;lIld Fisheries /)( 'I 'I' /ofl"/l'1I1 Cor/JIIl'lllinll orS/1 '-til I ' .I(J/ :~('II ,\' (,II , J-'isl/('I'il' ,\'

/)(' I'I' III/J/I1('111 Cor/}(}I'IIIillll o/S/I LId I'll \V.lIIII 'l'SIIlWIII,\' ( P/I,) Uti I l)XO (-() SA I )() (W) <II I ().\,)

l llllif very recentl y. neither linited Kingdom nO)' Soulh Arri c; ln co nlpanie"

legislation clllitained any pro v i ~ ioll s lJc.ding w ilh the gener;d tiuli es or

din:l' tor~ direc lor~' duti c~ we rc hascd on case law. thai is. on CO l11nHln law,

Thi s wa, ;" :-'0 till: c<l~e in A u, tr<lli<l and Ncw /.e;"<llld, IloweVL'r. Austra li a <lnd

New Zeal;lnd hmK e <lWilY !"mlll thi , Ir;ltiilion <I I'c w year~ ago ililti cllITcnily

hOlh thc A u:-. lrali iln Corpm"Iions Act or 20() I <Inti the New I ,ea lanti

CO lllpanie, Ac t 105 o r Il)l),l contain provision, dea ling w ilh tlirec tor~' general

dutie~ (see 's I XO- I X4 or the Aus tr;di ;1Il Corporations Act: and ss 13 1. 133.

117 a lit I 13X or Ihe New Zea land C() ll1palli e~ Au), It SCl' I11 ~ that th c:-.c

e ,'l arnpl e~ werc follo wcd and currently the Unitcd Kingdol11 COlllpan ies Acl.

2006 (c 46) and thl' Soulh Arr ican COll1pallie!-. Bill of 2007 (ava ilable at

< h"II:IIII ' II 'II'.rlli,go\', : lIl» contain com parable pro v i s i l1 n ~ on tlircctor,' gen­l'ra l dutie~,

In the ca~e of the United Kingdom Companics Act. ss 17 1- 177 \eCIll to contai n an ex hausti vc cod ilicalion o f director,,' dulic~ (,cc Mllrlnll ( 'IIIII/IIII/ \,

1,1111' N(T/"II' /nrl/ ('1I1I 1/ lf'lilil '(' 1:'('111/(11/1\ : f)I'I'I'l'I/'illl.: 11/1 ' / 1111111111"/' ( I I /,IV

II III I " d

3·-17

OOl656j (Mar 2000), ava ilable at < hllp:i/Il 'II 'II ',ben:g(J\'.lIklbbJ/co-ocl-20061 c/r-rel'ielvlpllge25086,hlllll> (, D el'eloping Ihe Fmlllell'OrV) in pars 3.20 and 3.82; Modem COlllpollr LOll ' Rel'iell 'FJI' (/ COIIIl'elilil 'e ECOIIOlllr: COlllplelillg Ihe SlrtlCIII/'(' (URN 0011 JJ5) (2000). ava i labl e al < Iillp:i/Il 'II'II ',h('n :gol', lIkI bbjlco-(/cl-20061c/ r -rel'ieli/page 25080, hlllll> (' COl1lp /eling Ihe SI J'/IClllre') in pars 3,2, 3,6 and 3,1 2: and !'vlot/ernisil/g COlllpllnr L(/\I': The WIiile POI)e,­

(Mar 2005), availab le at < Iillp:i/Il ' II 'II: dli ,grJ1'.lIklcoIlIIHlllie.l'bil/l lI 'hil('lwpa II/III > (' Whil e Paper') in par 3,3, stati ng that the code is ex haust i vc in nature and that it wi II rep lace the cOlllmon law),

The South A rri can COlllpanies l3i II or 2007, however. mlopl ing an approach ~ il11ilar to s I X5 of Ihe A ustralian Corp() ration ~ Act. speeificall y retains thc cOllllllon - law duties or direclors (~ee cl l) I (6)), In thi ~ sense. it may bc appropriate 10 ~ay that c l 91 onl y provides ror a parlial codification or dircc tOl'~' duties. hUI il is probably beller jusl 10 state that the South Arrieall COlllpanil'!-. Bill now contains statutory pro visions dea ling w ith direc tors' general dtllic ~ and that these duli es arc comparable to directors' cO lllmon- law duties, The i s~ u c as to in whose inte re~ t s direc tors should acl. i ~ dea lt w ith in

the United Kingdom COlllpani e!-. Act (in s 172( I )) and in the Soulh African Compa ni e~ Bill ( in cI 9 1 ( I )( h )), However, there see llls to be fundamental dill'crences between the United Kingdom and the South A fri can approaches,

In thi s ana lys is the rocu:-. i~, lirst, on the stakeholder debate, The di sc uss ion

then tical s with the way in which directors ' duti c~ arc trea ted in the Uniled Kingdom Companies Au and in Ihe South African COlllpani e~ Bill, As part or the genera l discuss ion on the United Kingdom and South Arrican company- law rcl'orm programs. we con:-. ider some gcneral approache~

towards company la w and, in parti cular btil brieOy, what is meanl by Ihe eoncept ' thl' best intercsts or thc company as a whole' , We rocus. more

spec ificall y. on Ihe approach that was prekrred a~ part or the rc rorlll processes anti on whether the United Kingdom COlllpanies Act alld Ihe South A rri can Companies Bill have adopted Ihc approaches they prore~~ed a~ part or thei r company-law rcl'orm programs, Thi~ analys is i ~ co ncluded by making ~() lIle

s uggc~ tion s on the I11mt appropriate approach to he adopted in respecl of direc t()J'~' dulies. anti by J1r()po ~ ing ou r own theory as we ll a~ making sO l1le reCOl1ll11ellllillions til incorporate thai theory into Soulh A rri ca ll I cgi~ l at i o n ,

2 The Stakeholder Debate: Tensions between Shareholder Primacy and Recognising Other Interests

2,1 The American Debate

In America. t c n ~ i()n s between shareholders as potential primary ~ I a "eho ld ­

ers and other stakeholders were recogni sed se eral years ago, In the early 19~()~ . I3crl e and Dodd debated the issuc or shareholder primacy versu ~ the prol L'C liol1 III 11111 ,'1 ' I : I"L'lllllde r~,

Ikl It , ;11 )'111 '" III 1;11'11111' lit' I Ill' , hareholder primacy norm , He !'- Iated thilt IIlIl ','IIII \ 11 1I 1t! 1111 1'1111 " ' 11 \ II I , II :II'\ 'II' '' l ,," '' ill 11'11 , 1 ror the ,ole hellL'lit Ill' the

348 (2007) 19 SA More LJ

shareho lders. The exc lusive obli gati on o f directors was therefore the

maximi sati on o f shareholders' property (see AA Berle ' For Whom Corporate

Managers arc Trustees: A Note' ( 1932) 45 !-Iwvanl LR 1365-72) . He based his

argument o r trusteeship on the ract that shareholders are ow ners of a

company. Directors' obligations to shareho lders are based on their ro le as

trustees or agents o f the shareholders. He therefore c lassir-ied a company in

term s or the separation o f ownership and control. Dodd , in contrast. argued that directors serve as trustees for the entirc

communit y rather than ror shareholders onl y. Therefore, directors should use

the company's resources to address the interests of a w ider va riety o r

stakeholders. By doing so, directors would belw ve in a soc iall y responsible

manner (see EM Dodd ' foor Wholl1 arc Corporat e Managers Trustees?' ( 1')32)

45 /-/{II "\1l1 rd U< 11 45; see also AA l3erle 'Curporat e Powers as Powers in

Trust ' ( 1<)3 1) 2 I/ww ml LR 1049-74). Later Dodd acknuwledged that it was misleading to treat directors as

trustees ror employees, conslimers and uther interest groups (see EM Dodd,

re v iew ing ME Dimock & HK Il yde /Jurellllcmcy lIlid Truslee'ship ill Large

Co rpol"£lliol/S ( 1940) in ( 1942) 9 Ullil 'asily (~r Chimgo LR 538 at 547: sec

also JE Fisch ' Measuring Erliciency in Corporat e Law: The Role of

Sharehoilil:r Primacy' (2006) 3 1 .I 0./ C()rpol"(( lioli LOll ' 637 at 647- 8). However, it should he observed that l3eril: never disputed the fact that there

arc other interests in a corporati ()n that could not he ignored. In hi s work w ith

M eans (AA l3erle & GC M eans The Mot/all COIPUJ'(Ilioli lIlid Pril'lIle

Pml'alr ( 1932)), they made the point very c learl y (a t 352-3 and 356):

']' t"llt; I"r[!c puhtic eorp'" "lion I involw, Ihe inh.:rrcialinn or a :vide divcr,ily or :~(l nollli.~ inlcrc,". Iho,,; or Ihe "owner," who ,upply capl1al. Ihose 01 Ihe wnr~cr, who nca!c. Ihose or Ihe con\ll llle'r' who give va lul' 10 Ihe' prudul''' or enlerpri,e, and atmve allll""e 01 Ihe c,"l1 rn l who wiL'ld powc r. '

"II i!'. CtH1Ceivahlc. illdeed il \Cl!I1l~ almo"l l.!\sL'll li:l1 if Ih~ t"orpOra lL' \y~I L'1ll i\ 10 "un ivc. Ih"l Ih ~ "clllIl,..,I " Ill' Ihe grl',,1 cmporalion, ;,hlluld develop inln ",PIII'l' ly neulral. Icdl ll(lcracy. ha lalH..: ing a varidy Dr claim:>. hy various gruup:>. ill till' L.:ll ll1lllllllll y alH l . "s~lgl1 l n~ ~ll ~;1c h a pOrlioll or Ih" iIlC'"I1l' ;, lre'"I" Oil 11t ~ t""i, "I' (lllhlic pil i icy 1',,1 her Ihall (,rlv"le CI 'IlIllll y.

In actual ract. Ikr le's onl y poi nt was that if you recognise duties of direc tors

also to w:1 rd ~ util er int erest groups, the standard or the duties or managers and

din,:c tor~ wi ll he eroded . II' they are not trustees ror the stock holders alom:. all

that w ill cO ll1e out ()r it in the long term, l3erlc argued , was ' massing or group

arter group to assert pri vate c laims by force or threat - to take w hat each can

ge t. just as corporate managements do' (Berl e (1932) op cit at 136H). That is

w hy he argued that when the fiduc iary obligalion of the corpora te

mana~ell1enl and contro l to stockholders is weakened or eliminated, ' the

lllan a~e ll1 ent and "control " becoille for all practi ca l purposes ahsolute' (idem

at 1367). This argument was, w ith hardl y any modification, relied on in the 1998

United Kingdom /-Ial7lpel Reporl to once again justify shareho lder primacy

(see The COll1l71illee Oil COrpOralI' (;OI 'I'IWIII"(' ( I !J'JX) ill 1';lr 1. 17) . The

modem L'x prL's~io n or BeriL"s k"r\ i \ 11 L':1tl\ \ 1111l1I l:1l1 \ \' c1 1> \ IIII' 1 1I 11' I\\'ill!~

STAKEHOLDER DEBATE 1-\ 'D DIR I~CTORS' 1'10 ' 34<) ·

comments of RAG M onks (with refe'renee to 'A Consultation Doeumenl from

the Company Law Rev iew Steering Group ' (Feb 1999), availab le at

< hllp://I 1'1 I'H'. lens-I i bra Iy collilill/olDTl0399 F I NA L. hll7ll> ):

'Whal i;, Ihe queslioll? Ii i;, 1101 whclhcr Ihe variou'i corpnrale cOII ~ lilu cnc i cs haw cqlla l cnlillcmcnI;' or whclhcr any nllc or litcm should hal'e prcfercncc. II i ~ n(ll IVhelhcr Ihe illlcrC;,IS or cach group arc necessarily 10 be l(ualllili cLi ill a delinililln or long-term va ilic 1'01' Ihe cntcrpri,e. II is - rather - whclhcr corporatc managclllcni i, elre,lively accounwblc to any inrormcd. lI1oli v'"Cd. indepcnden l and clTe, live clllily.·

The theory or shareho lder primacy is still the dominant theory in the United

Swtes. Even in establi shing the objec ti ves and conduct or the corporati on. the

A meri can Law Institute has suggested that 'a corporati on should have as it s

ohject ive the conduct or business activities w ith a view to enhance corpora te

profit and shareho lder gai n' (see Ameri can Law Inst itute Sludell l Edilioll:

Prillc iple'.\' (Ir CorporalI' COl'C'rtI {(lIce : Allalysis {(lid ReCOJIIl/lelldlll illll .\' a.\'

Adopled alld PmllllllgalNI by Ihe AJllericali Lall' Ilislil llle 01 Washillgloll {)C 1111 May /3, 1992 ( 1(94) at 55-60 in par 2.0 I ). The quest ion, then, is who w i II

normally be responsible ror the 'conduct or business activities ' o r a

corporati on'} The recommendati on or the American Law Inst itute was that it

should be done ' by or under the superv ision of such principa l seni or

executi ves as arc ciesignaled by the board or direc tors' ( idem at R2 in par

3.0 I ). The A merican Bar Assoc iati on's M odel Business Corporati on Act states

that ' the business and afl 'airs of the corporati on shall be managed by or under

the direc tion , and subject to the oversi ght, or its board or directors' (see

American Bar Ass()ciation Model Busilless COIjJO/'{f lilili Ael: O/ficial Texl

lI 'ilh Ollicial COJIIllleli1 alld SWIIII II IY Cmss- I?elerellces I?evised ",mugh .Il1ne

2005 (2005) at 8.4 in par 8.0 I (b)). Under such a model it is not diflicult tu

conclude that directors and sen ior exeeu ti ve~ rulfilling their duties wi ll have

enhanc ing corporate pro fit and shareholder gain uppermost in thei r minds (see

A merican Law Institute op eit at 56). Thi s view i ~ ~ lIppo rted by the rac t that

the A meri can Law Institute recognised only limited exceptions to the genera l

objecti ves or a corporati on:

'* ~.tll (/1) I,vcn ir corpor,,'" prnlil anti \ha rdlllld ~r gain arc 1)(11 Iherehy cnhanccd. the l"Orpnralitlll . in the l'onLiUcl of il :>. hll.\illc~:-,:

( I ) b olt ll g~d. III Ihe ,,"lie eX lenl '" a ,,,"urallxr\lllt. III acl II ilhin lite Imulldaric, ,CI b) la l\': (2) May lake inln accounl clhica l con, idcralilln, Iltat "rc rca\llllahly regarded ," appropriale

10 Ihe rcspon, iltle c(lnducl "I' bu, ine,s: and ,.I) May deVille a re'''tlllah le '''11111''11 ti l' re,o''''ce, III pub lic wet rare. Itlllllallilari,,,1.

e<i Ill': lIi,)Ilal . and phil:llt1hropic pllrpo'e,,'

2,2 The Intensification of the Stakeholder Debate

It is beyond dispu te that Ihe stakeho lder deba te became particular ly

prominent w hen the ba~ i c perception of the company changed.

A t lir~t the only rea l concern for a company and its directors was lhe

ma xil11i sa li ll ll III' I'n'lit ~ (~ee AA Serle 'The Impact or the Corporation on

( ' la \\ il':1 I Till'lIl v ' i II : rJlIlIll "~ Clarke (cd) Theories (~r COlpomle C()l'nnClll ce:

n,, ' 1'111/'''''1,111, "I I,"IIIII,,,i,I/I\' ,,!,( '(Jll!IJmll' (;111 '<'1'1/(11/('(' (200·1) <1 t 4),..j.,) et

350 f]()()7} 19 SA Jere LJ

seq; see also JJ du Pless i~. J McConv i I & M Bagaric Prillcip/es oj

COIilell //Wrrtrr Corporole Gm'erlw/l ce (2005) at 4 If). Profits ror whom? T he

shareholders as they were seen as the 'owners or the company '; the primary stakeholder:--: and most imponant pruviders or cap ital to enable the company to conduct business (sec Dodd op cit at 11 46: MM Blair 'Ownership and Control : Rethinking Corporate Governance ror the Twenty-First Century' in : Thomas Clarke (cd) 7'l1l:'IIries o/" Co /portl l e (jOl'em£lllce: Tlte Phi/oso/iI/il"ll/

Flil/lldoliolls II/" COljlOrtl l (' (j(I\'e l"lllIlI ("(' (2004) at 175 and I HI ). Gradually thi s perception changed. T he company. especia ll y the large

public cO Jllpany, Glme to be see n in a dilferen t light. People started reali sing th,lt there were ot her stakeho lder:-- in a compan y too: that ir the on ly purpose o r a eOlllpallY was ' the Illaxillli:--a ti on or prolit s I'm thL: shareho lders', soc iety as such c()uld sulfer t remL:IHlmlSI y - pour work i ng cO lldi t ions ror worl ers. tlH~ exp loi tation and pollution or the environnlL: nl. and so ()n (sec Du Pless i ~.

M cConvi li & Bagaric op cit at -1.).

Nowaday:--, it is rairl y gL: lll.: rall y accept ed that ' in ruture the deve lopment or loya l, illc lll siVl: stake hold 'r re lati onships wi ll beeoll1L: one or the Jllost inlport ,lIlt detL: rnlinant s ur cOlllll1crcial viabilit y and business succc:--s' (D WhL:cicr &. M Si ll a np~i;i '/J/(' Sioke//(I/d('l' Cor/1l1m/ioll ( 1997) at i.r: sec rurther .IE Post, LI ~ l' rL:s tun & S Sach /?e(I£:/illill g Ilt l' C(}/jlllJ'(l lioll (2002) at 1-3: and

M .I Roc ' Prdacc' in : MM Blair & M.I ROL: (cds) 1i1l//1/oyces & Cmportlle

(illl '('Fl/IIIU 'C' ( 1999) at I ') ,11ll1 tlw t ' recognition o f' st,lkeholder concern is not

onl y go()d husiness, but polit icall y cxpedicnt and morall y and ethi cally .iu :-- \. L:VL:n ir in til L: stri ct Icg;li SL: nse they remain direct ly accountab le only to sharei1oldel< (I)SR Leighton & 1)11 Thai n Mukillg /Jotllds Work ( 1997) at

2."\),

T ile ract th at there has heen a shirt ill publi c ()pi nion towards the rcc()g lliti () 1l () r a wider va ri ety o r illtere.,h. is also ckarl y recogni sed in South Arr ican lit erature (.,eL: I I ~ s:--L: r 'The l ~ nli g ht e n ed -S harch oiliL: r- ValuL: Approach vcrsus Pluri sll1 in the ManagclllL:nt oi' ClJ mpanies' (20()5) 26 Ohill'l' 7 19-25 : M K Ilavellg:1 ' Direc tors' hdllciary Duties unlkr Our i-'Llture COll1pany- La w Rq.'.illlL:' ( 1()!)7) I) S;\ Mal' !..I .l 10 at ~ I-I : .I.1l)u Plc~si~ ' J)irL:k tcu re se Pligtc

tcclHHlr Part yc Ander~ , IS dic Maatskappy'( 11)!)2) 25 /J(' JIIl'e 37H: ,lIld M Larkill 'The I ,' idllciary \)t1ti e~ ur the Com pa llY J)irector ( II ), ( 1979) 7'he SOlllh A./i'if'll l/ ('Oill/llill" U I ~ I <1t ElI - I ~ 1 7) . The w ider va riety uf' int e re~ t ~ inc ludcs. inter al ia. tllUse () f' the f'oll()w ing :-- takeholdns: ill vestor~, L:rnp loyees,

consumer:-- . thc gL:nL'J';iI fluhli c. and the env ironmen t.

2.3 Summary It should he clear ['rolll the preceding discuss ion that since the 19:10s it has

been rea li ~ed that there are va riou s interests, apart rrom that or shareholders.

that playa role in the succe:--s or corporat ions. The on ly rea l issue was how to develop a workab le corporate mode l in which all 'i takeholders arc j'('l'Il)!,n iscd . This debate is still conti nuing and there is st ill l'Iln,idl ' r:lhll ' dl\l 'q'(' JlL'L' i ll

opiniol1 lIn tlii , . Ilo\\e\'c r. , L' rillll, ;It'''IIiP'' 1i:1\(' 11I'I'JI 111.11'" III II I I 111111111' , h\

STAKEIIOLDER DEBATE AND 'DIRECTonS' FIDUCIAR) DUT IES 35 1·

both the United Kingdom and the SOllth Arri c<J n governments to bring their

corporate- law models in li ne w ith recogni sed theori es or the company and its

stakeholders. In what ro llows we dea l wi th thL:se attempts in the Un ited

Kingdom and in South Africa.

3 Recent Company-law Reviews in the United Kingdom and in South Africa

3.1 Overview

In both jurisdicti ons. company-law rerorm has heen quite prominent In

recent times. The prev ious Un ited Kingdom Compani es Ac t dated back to 19X5, while the South A f'ri ca n Companies Ac t i :-- slill that rrolll 1971

A lthough sevL: ral amendments had been made tn hoth pieces or legislation,

these amendments WL:re passed piecemea l to refleci some internati onal practices or to add re)'s spec ific issues that caused prob lems.

3.2 The United Kingdom

3.2,1 The Lead-up to the United Kingdom Companies Act. 2006 The United Kingdom began w ith a process or company- law rev iew in

199H. T he ai III o f the rev iew was to deve lop a si mple, modern , erti eient and

cost-e lfec ti ve rramework to carry out business activi ty in Britt an in the twen ty- (irst century. A number or consultati ve documents were iss ued during the process. T hese dea lt wi th thL: stakeholder deba te in detail.

The (irst doeulllent issued by thL: Company Law Review Steering Gruup

(Model'll COli/pum' LlIlI' j(JI' (/ COIII/IC'li/il 'C' ECOIIIJIIIY: The Sll'lIlegic Frwllell'ork

(UNN W/(54) (reb 1999), ava il ahle at <I/IIIJ://II 'I1 ·1l :dli. gIJl '.lIk//i/e.l'//i/e2327f.J.

1)((/ '> ('SII'lI /eg ic FrtllI/ l'll 'ork'») tIL:a lt w ith the scopc or cO lllpany law in chapter

5. The Stecring Group rererred to the traditi onal view that direc tors should

manage a company ror the hendit or the shareholders. but subject to the sat'cguards ['OJ' the belld it or actual and potential credi tors (~cc in p,lr 5. 1.-1).

Il owL:ve r. it wa~ recognised thai there is a view that the hellelit or the cOlll lllunity as a whole too play., a rule (ibid).

' I Flor case or ret'crencc' (S/m/l'gic hWII(,ll 'Ol'k op ci t at .17 in par 5.1 . 11 ).

thL: Steering Group rL:rerred to two hasic approaches as rar as company illterL:sts were concL: rn L:d. namely the ,o-ca lled 'enlightened shareholder va lue' appru;Jch and the ' plurali st' approach, In o rder to prevent rocu sing on :--cveral lIncL: rlainti cs in detL: J'Inini ng the eX,lct mca ning or these ~t W() approaches ror purposes or our cu rrent discussion (see SII'lI/ C'gic Fmlllell 'ol'k

op cit at 37-46 in pars 5. 1. 12-5.1.33 ). we ~ illlpl y rerer to the Steering Group', own "ullllllary (idem at \'i in par 5) or the two dilferent approaches:

./\ ""1"" 'I" "" ""til" 1ll'III'~enlhl' "cntit!hlcncd shareho tder lalue " approach. II'hidl " ' 'LTh 111:11 1j111"lth III " II'i ,IIII ." , I"I1' 1 I·"n I", ;1l'hi,' I ,'d lVi lhin pr~,e l1l principle,. hili l' 1l\llr i ,, ~ ,11:11 dll n IH I ', , 1111 . 11 1 ·. I' .IIt"lhlld l· ' .... 1l,II"t·,h III ,III l'I1II ,! .. !llI l' llcd :tlld incllJ ... 1\ 1...' \\ ; I ~ . .IIHI lil t'

352 (1007) 19 SA Mere LJ

"plu ra li slk " "pproac h. which ",,,c rl ' Ihal cn-(Ipc rali ve and producli,'c rclalion, hi p' wi ll on ly b.: o plirni ,ed where di rec lor, are penn illcd (or rcqu ired ) 10 balancc , harcholdcrs Inlerc"s ", " h Ih (),e o r mher, c(}mll1illcd 10 Ihc company'-

It should be obser edlhat Ihe Steering Group ack nowledged Lhat what they

called 'enli 1!htened sharcholder value' is ol"tcn rel"erred to in the lilerature as

'cnlightencd se lr intcrest ' ( idcm at 37 in par 5.1 . 11 . n 27) and that 'current law

i ~ not widely recogni scd as embracing the enli ghtened shareholder value

approach ' (idclll at I'i in par 6) . Irrespccti vc or these acknow ledgements and

thc unCl:rt<lint y regarding the cxact meaning or the so-ca lled 'enlightcncd

sharcholdcr ,dIlC' appro<lch and the ' plur<ll ist ' approach, the Steering Group

sec llled to st rongly ra vou r the 'cnl ightcncd shareholder val ue' approach (scc

idclll at YJ in par 31) , at42 in par 5.1 .23. and <It 4,\ cl scq in pars 5. 1.25 et scq ).

Thc COlllpany La w Rcv icw Stcering Group issucd another Consulwt ion

DocUlllcnt in March 2000 (scc D CI'eto/ling ,lie Fmlll(, II 'ork op cit ~upra ). Ch<lptLTs 2-4 dealt w ith corpor<lte govcrnancc i s~ ucs wilh thc core issue or

cmporate govern ,IIH':c. as rar a~ dircc tors and o fli ccrs arc concerncd, bcing

covcred in Chaptcr .\. In thi s C()n~ultati o n Docuillent , thc rcJ"erence to thc

so-call cd 'enli ghtened shareholdcr valuc ' approach was rar less prominent. Therc W<l S. in <lctual !'<lct, just onc rerercncc to it in thc main tcx t or thesc

chapters (at 14 in par 2.2 1). Thc ' plurali st ' approach i ~ mentioned on 2 1

o 'C <lsions in them. hut the main purpose or thcse rei"crenccs was to rejec t it

rather than to cx plain it rurthcr or emphasising thc variations or such an

appn1<lch. Thc Stcering Group rejected the ' pluralist' approach as nne that

should hc rollowcd in defining dircctors' dutics (scc. in parti cular, at 17 in par

3. 1, and at 23 ct scq in pars 3.20 et seq ). Durin" Novcmhcr 20()() , thc Company Law Rcv icw Steering (jroup i ~s ued

c . yc t anothn Consultation DocU\1lcnt (scc Cf)IIlJi/elillg '" l' ,)'1 rt 1r'1/tr(, OJ) Cit

~ upra) . In this docuillent. n.: l"crc llccs to thc \ .: nlightellcd sh;trl.:holder v<llue' approach tli sappcarcd cOlllpictc ly in thc chapter that dC<llt w ilh direc tors'

duti c~. Thc ' plurali st" apprll<lch wa~ onl y mentioncd oncc ill thc main tex t and

onl y to uhscrvc th<lt the Stccrin i:! Ciroup S<l W it as a kcy Ilbjcc tion that the

~upponcr~ or thai <lpproach didnllt suggc"t 'a practi calilleans 01" dealing w ith

thc LTuci;d LJII L,~ ti () n or how such it duty could hc cnf'llrccd ' ( idem <It }4 in par

.\.5 ). BOlh the / :ill ll /I</ '/ Jl I/ " (liNN ()/N4? 1I1It! URN O/IY-I3) or .Iuly 2()OI and the

(iovcrn mcnt 's Wlli' l' I'll/ I('/" or 2()05 (ava i lable at < III1/ I:IIII 'II ' II'. dli. go l '. IIk1

Cfllll/Wlli l •. liJil/l l l' ilil ('JllIPl' rilllll » al ~() supportcd the ' cnli ghtened slwrcholder

valuc' approach. It was stat ed in the Whil c Pllfler th;lt the dl\tie ~ or director~ are owed to thc co mpany and that onl y the comp<l ny can enrorce theJll . The

United Kingdolll Governmcnt was also in ravour or the 'cnli ghtened

sharchulder value' approach as it would dri ve long- term company perl"or­

mance and max imise wea lth alld welfare (~ec in par 3.3). On -1- November 2005. thc Company L aw Rc l"orm Bill W,IS int roduced i ll

the House or Lords and in November 200A ti lL' ('ll IIlP;lIlil '" 1\ ( I 1('l(' i ll'li I"l ly:d

a'sent. few o f the sccti on" in thL' l\ l 'l h;I\( ' ;dl( ', 1l1\ (11 11 11 ' 11 1111 l"ll ,. ,11 1l 111 1!'

STAKEHOLDI:R DEBATE A D DIRECTORS' FIDUCIARY DUTIES 353

other prov isions will come into force during 2007 and 2008. A ll o f it.

prov isions should be effecti ve by October 2008.

3,2,2 The Duty to Promote the Success of the Company Corporate governance is probably the most prominent fea ture o f the United

Kingdom Companies Ac t. 2006 (see A K eay 'Sec ti on In( I) or the

Companies A ct 2006 : A n Interprctati on and Assessment' (2007 ) 28 Th e COli/flO II)' Lawyer 106- 10). As stated earli er. the United Kingdolll Companies Act, 2006 prov ides for an ex hausti ve statement or directors' dUlies.

Secti oll I n ( I ) or the Act provides as rollows:

' 172 Duly 10 pl"flnlOte Ihe slIccess nl' the c(llllpany . C I ) /I dircc lnr o r a co lllpany musl ac t in the way he consider,. in good railh. w(luld be m",1

li kely in pnll11 0ie the , ueee,s o r thc company ror the hendi l or ils member, as a who le. and in ti l II IIg M l have l'L'gard (amongsl oth er mailers) 10 -

(II) the li kdy conscquence, o r any dec ision in Ihe l on ~ Icrm . (b) Ihe in lc resls o r Ihc cOlllpany", c mptoyccs. -k) Ihe need 10 rO>lc r Ihc clJ lI1pan)" bu,ine" rci' lIi on, hips wi lh , uppl ie rs. cUsto ll1crs and

others. Cd) Ihe imilaci .of Ihe .c()mpany', opera li ons o n Ihc comill uni ly and the environment. Ce) Ihe de,u'a hdil y 01 Ihe cOll1pany mainlaining :J rcputalion ror hi l!ll ' Iandart" n r bus inc,s

conduct. and -(/) the need to acl rairl y as hClwee n mcmbers o r Ihe company. (2) Where o r tll the exle nl Ihal the purpu~es or Ihe company con,ist or r incl ude purposes

o lher Ihan the henchl 01 li S mcmbers, suh.seclion ( I ) ha, e lke l 'J> ir thc re fcrencc 10 promoling the su:':css (II Ihe cump:J ny lor H1C !Jcne lil 01 It, m ell1ber, we re 10 :Jchieving th ose purposcs.

(:I) . t he dUl y IIllposed by 11 1Il, sec tlllll ha, e il eci subJec t to any enaC lme nl or rut e u r la w rC,!lllring direc tors . In cert ain c irc umslances. III con, ider or act in Ihc interesls o r credil nr, o f the company.'

It should be c lear that the primary ex pectati on rrom directors under thi s

dut y is to act in gaud faith to promote the success or the co mpany for the benelit or its members as a whol e; in other words, shareholder primacy has

been retained. However. apart rrom thi s duty. the direc tors lllay have regard to the other matters . prilllaril y those l isted in subs ( I )(II J-(/) . but thi s li st is

spec ilicall y not made ex hausti ve. The lisled mailers that lirecto r~ may also consider arc probabl y the 1110st comprehensi ve li st or ll1 a tt e r~ contained in any

modern company -law leg islati on a 11(1 probably al so the c learest recognition in

such legislati on or the importance or int e rc~t s other than those o f ~hareho lde rs. namc ly the intcrcsls or other stakeholders such as empl oyees. supplicrs. and customers .

However, the practi cal appli cation or thi s sec ti on is unclear. First. direc tors

arc prov ided w ith an un f"c ltered di screti on in term s or thi ~ provision. T hey

should manage a company in a way they consider would promote the success or the company, for the benelit of it ~ mcmhers. But there is no objecti ve

criteri a indicating how they should exercisc thi s important discreti on. Secondly. the list or i s~ue~ directors need to have regard to is also not

ex hausti ve. seeing that it is staleci that direc tors need to consider these issues 'a m() n g~ t other mailers' . There is no indica ti on of what these 'other mallers' L' lIt ;til. Thirdl y. thl'rL' i!-. IH I tiL'linili on or ·the success or the company' (sec 1\('<1\ IIp ( 11 .1 1 ICI(iI l ' lll ;dl " , lil ll'" , II Iltl' (Ilhcr ~ tak c h o ldc rs will h<l vc ~ t;llillill 1!

III (11 11 11'(' 10111 "( 1" 1', I II I.d,,· 11" ' 11 I 11 I<-Il ", I 1111 11 (·(III " i(ic-r:lli li ll. lIlIk ..,,, il ('(I ld<l h~'

354 120{)7) 19 SA Mere LJ

establi sheu that the illlerest or the company itself had bcen contravened, and

that w ill have to be done by way or a shareholdcr derivative ac ti on (in terlllS

or Ihe uerivali ve action in ss 260-26-+ or the United Kingdolll Companies Acl.

20(6), This was one ur the dilemillas emp loyees raced under s 309 or thc

United Kingdom Companies Acl , 19 X5 (sce J.1 du Plcssis &.1 Dine 'The F,lte

or the Drart I:irth Direclive un Company Law: Accoillmodation Instead or

1I ;lrmoni sa t ion ?' I <)97 .I 0/ Il llsin (" l s Lilli ' 23 at 46: G()\rer \" Princi/I/(,S I!/

M'III('m CUIII/m".l' LlIIr 6 cd (1997) by PL Da vies at 6X ; L Roach 'The

P;lradux 01 ' the Trmliti ol1a l Justificati()n 1'01' Exclusi ve Shareholdcr Govcrnance

Protec liun : I ':x panding Ihe Plur;Jii st J\pproach' (2001) 22 nil' CII/II/WIlY

LIlII'n',' l) ;11 1'\ who n: rers to the ' highly suspic ious drafting or sect ion 309 or

Ihe COlllpanil:s I\cl 19X5'), Sl:ction JOt) read as rollows:

' .lUI) Din'l'lors 10 ha,'l' rl'gard 10 i"ll'I'c,~ls of l'lIIploycl's I I ) Th,' 1I1"IIL' r, III IVhi"'l Ihe <Iil "L' IIl" III'" L'IIIIIP""Y arc III h" VI: rL'g:lrd ill IhL' perfllllll :IIIL'L'

III th eir IUIlL' lillll \ illl"illdl' Ihl' iIlIL're~l\ 01 11ll: ~tl IHP: IIl Y'\ C ll1plOYl...'l'~ in }!,c llL' ral. a:-r. well ii' Iile il1ten.'!'. l" of il \ 11ll' llIhl' ''''''.

(]) J\ l 'L'lIn hllg ly, IhL' <lill y illll'",,' <I hy Ihi , 'L'L' III IIIIIII Ihl' l ilrL'Cilll" i, IlIVI:<I III hy IhL' 1I1 IOlhe l'III IIP"Il ), lalld Ihl' L'(lIlIP""Y ,,11I1lL') alld i, L' lllorL'l'ahk ill Ihe ,:11111.' w ay a, allY olher 1,<IIILI:1I y dill y Il\wd III a COIlIP"Il ), III ih din:c llll" .-

Ilowever, Ihe diknlllla 1'01' the other interesls Illentiuned see ill s more aculc as

thl: h;lsic duty or Iht.: Liireclors is no long.er a g.enera l CUllll1lon - law outy. hut is

n(lw ex pressed very cbl rl y in s 172: Ihl: direclors Illu :-. I in the first instance

' prtlnlOle Ihe success or thl: cOltlpany I'm Ihe henefit or ils members as a

w llole'. It i ,~ onl y ' in dning so ' Ihat Ihey Illay 'ha ve regard (among.sl other

111;lll l: rs) 10' olltt.:r inleresls, Olle Gi ll hardl y illlaginl: a nlore vagul: allli elu" ive way of rt.:cogni ~ in g olher

inlcrest:-. anti il is nol dil'li cult to pred ici thai chall enging limes lie ahcad ror

Ille ollieI' slak t.:htl lders hdore a clearer piCIUrl: wi ll emerge in lhe Unilt.:d

l<ingtllll11 as rar a ~ Ihe sllhslance (II' Ihe"e 'olher inleres ls' i" l:oncerned, In

;Iclua l r;I L' I, il 't.:e l11" 10 , uggesl Ihat lhe onl y praclical c"n ~cque nce or Ieg isl;lliVL'l y recogni" ing Ihese lllhl:r illieresis is Ihal lhe aclions or direc tnrs

wou ld n(ll be Ilpen ror any clwllenge ir Ihey have 1/01111//." lakl:n Ihe intere, ls

01 Ihe cOlllpall Y a" a whol . (tielillL'd ; I~ Ihe ctl ilec ti \'c inlerestor Ihe cu rrenl ,1I1l1

rUlurc sh;lrL' holdL'r,,) ililo considl:ralilln in Illakillg dec ision s, "III It/S() uther

illiL'I'e"h, I'hl' clllharra" lllclil 1'01' Ihe dircc lllr" hdllre ",lOt) tlr thc I Jniled Kill gdol11 COlllpanil:s I\ct. II)X5 ron11l:d pari or Ihl: Unil ed Kingdom

legislalioll , in pUlling the inlcreSlllr thl: el1lplll)'ees ahove 111;11 ol ' llll: cOl11pany

(currenl ;Ind rutllre s harelll)ld er.~ ) wi ll nol he rorgolll:n easi ly ("ee e{/r/, £' I'

O{/i!,' Nell',l 1.1t! 1196212 1\ 11 I ~R 929), That is why it has hee n sa id that one elfeL:t or s 309 W,IS 10 dilute diree lors' accounlabilil y III shareholders rather

than to ~ lre ngthe n their accounlihi lil)' 10 employees (sec iJa vies op cil at 603,) Undn Ihe COmnHln la w, other inl crests, li ke employee, ' intere~ t s, were

con"idcred to be peninent only when lhey coincided "vith the cO ll1pany'~ be~1 in lerests (~ee 1/1/11/111'(11/ I' Prices /JO /ml C{/I/dl(' Cn ( I R76) 24 WR 754: /-flll/OI/

I' We,ll Cork R{/i li l'llY Co ( 1883) 23 ChD 65-+: ;lIld q:e :Ii" 1 I K lei II & .1.1 dll

Pl e~\ i " 'Corror;lIe Donalioll ', Ihc Ik' i 1111 l' I'I',1 " I II,, ' ( '111111 ','"1 ,lIld III< '

STAK EIIOLDER DEBNi'E flNt) DIRI: CTORS' 1' lDlWIARI, Dl III-,S , .' 355

Proper Purpose Doctrine' (2005) 28 Ul1il 'ersitY of' N('II' SOlllh Wal("l LR 69 <II 70, 8 1-2, and 97),

However, the draflers or s f72 may be applauded 1'01' stat ing in dirce l term~ which approach they prefered when it eame to the stakeholder debale, The Act secms lo provide a theoretical an~wer 10 the stakeholder debate, but ils practical application is rar rrom clear. It may we ll bc lhat over lime gu idelines on it s practical app licat ion will be provided in thc rorm o r coclc~ or best praclice,

3 ,2 ,3 An Evaluation of the Approach Adopted in the United Kingdom Companies Act, 2006

In the light or the prominent way in which Ihe so-ca lled ' enligh tened "hareh()lder value' approach wa~ promoled and or the clear rejl:ction 01 ' the

so-called ' pluralisi' approach in all consultation documenls leading up 10

s 172 or Ihe Companies Act. 2()06, il is hardl y poss ihle not to conclude that Ihe Lt:gislalure intended to il1lplemelll lhe s()- ca lled 'enlightened sh,II'CilOldcr va luc' approaeh as rar as direc tor,' dUly to promole lhc success or thc compa ny is concerned,

Ilowever. one should bear a k w important mallers in mind in eva luating the 'enlightened sharcholder value ' and the 'p luralisl' approaches as di scusscu

in Ihe consullation documents, It should at the oulsel be mcntioned thal the

labe ls or the two approachcs should nol be seen as sacro~ancl. Thc Steering

Group made it clcar that the lerills were used 'ror case of rel'ercnce ' (see .'ill'llll'gic Frlllll (' ll 'ork ()p c it at 37 in par 5,1, 11 ), Even a ~uperlicia l ana lys is of

aeademic material on the Iheories oJ' thc company and or the dilI'crenl

appro<tches or company law regarding to wholll dircetms owe Iheir duties, will revea l Ihal Ihi .~ is an immensely cOlllpleX area (sec, eg, J) Millon, ' New

Directions in Corporale L<t w Communitarians, Conlractarian-;, and the Cri sis in Corporate Law ' ( 191)3) SO \\ItI,I/iillg IlJII & L('(' U? 1.173: Whee ler & Si lianpiiii op cil -; upm; Post. PresIOn & Sachs op cit supm: C larke op cit supra: .I N Gordon

& M.I Roe COIII '(, ' :~(,II C(, lind F er.l'i .l'/ (, II (,(, ill 011 I'll I'll 1(' (7111 '1'1'111111('(' (200-+): R Kraaknlan, ])1' Davie", II Ilansmalln, G Ilenig, K I lop!. II Kand,1 & E Rocc

(eds) nil' I I 1I1111J1/" , III' ClI/l)() l'II/(' 1.1111': ;\ C'illlll 'l ll'lllil'(' (lilt! i-'lIlIl'/iIJl/(// / I/ )I)/'{/(I(' /i (:~ ()()~)) ,

Not on ly do Ihe theories or Ihc corporal ion and approaches to l: tlInpan) 1<1\.\, va ry considerahly, hUI Ihere are also ~o Iliany nuances <lnd \'<tri;l!i ons on the

I'ari()u~ theories <Inti <lpproaches to eO lllpany la w th<11 it i~ delinitely an ()I'ersimplifica lilln III slale Ihat <1 11 these theories and approaches boil dOlVn 10

a simple choicc between an 'cnlighlclled ~ harchold e r alue' approach and a 'plural ist' approach, M<lny lliher I<lbeb could be uscd - such as the

conslilLlency theory; the , hareholder primacy thc()ry; Ihe assLlciative theory: or Ihe inclu sive slakeholder theory - to exp lain dirrereJ1! appruache~ tll L'll1ll P:1I1y 1:1\\ '" rar <I' tlirec lor.~' ciuti es arc concerned,

Ii , II II lIld 1IIIIlin Ill' :iP llI'l'( ' i;lIl'd Ih<lt the Sleering (;nlllp delined the

'(' III I!, I,II 'II'.1 ,11.111 11,,1.1" 1 \ ,dil l' 'lJ'I ' I<I:ll' iJ ;11111 ' plllr:ili'I' "pprllach in ~ u L' h "

358 (20071 19 SA Mere LJ

the Companies Bill is w ider than the traditional pos ition when it comes to in

whose interests uirectors should manage a company.

3.4 The United Kingdom and South African Approaches Compared

T he United Kinndom Companies Act. 2006 is clear on the approach

preferred, namely tl~e 'enlightened shareholder value' approach . D.espite thi s

clarity, one has tll ask whether it is indeed the best approach to lu llow and

how it w ill be applied practically. The South African Bill is not clear at all and

conta ins clement s or both a shareholder primacy and stakeholder appruach.

This conrusion lllust he climinated.

4 A Proposed Approach : The Merry-go-round Approach

4.1 Arguments for and against a Shareholder Primacy Approach

The literature on, and reasons ror and against , shareholder primacy arc

almost endless . Here we can onl y li ~ t a rew reasons advanced in ra vour or

~hareho lder primacy. Sh<lreholders own the company and its assets <lnt!

accordingly have a l eg itilll~lte claim to have the company managed In their

own best interest. It i~ also argued that as the shareholders hear the n "k 01 poor corporate perrormance. they should have the ri ght to the company\

residual income. It has even been "a id that shareholder " hould get exclUSive

protection due to the fact that they cannot protect themselves contractually. A

linal argument in ra vour or sh<lreholder dOlninancc i" that unlikc the Interests

or employee" . consumer". the com lllunity anu tli c cllv ironment that are protec ted in separate measures such a" lahour hlw". liquidation (insolvcncy)

laws, consumcr protcction laws anti l' nvironmcn tal laws, thc Inten:"ts 01

"hareholders arc not protected in any Icg i ~ lation other than company law" . However, there are ~eve ral Ila w" w ith thc"e .iu" tilic;ltions or shareholder

primacy. Fir,, \. the c la"sil ica ti on o r shareholders a ... ' owllcrs ' i" Ilawed ~n that there are suh" tan tial dilfcn.: nces hetween ~ h ;lre ho lders and the tnltl1tlonal

owners or property. Shareholders OWII ~toc". which gi ves them claim" to

control and ce rt ain linancial ri ght". Bu t they do not have direct contro l ove r a

company's underl y ing a"sets. Director" arc also not directl y contrll iled by

their principa ls, as i~ thc case w ith traditional age nts (sec Roach op CIt at

9- 19). Secondl y. rrom the date or incnrporation. the company I S (J separate

lega l person w ith a separa te lega l personality anti thus cannot be owned.

T hirdly, the shareholders can ~ubstant ia ll y reduce thei r overa ll rt S~ via a

pol iCY of diversif"ication. Apart rrom pnvate companies. where the arti cles 0 1

assoc iation or shareholder agreement~ can occasiona lly lock shareholders 111.

~ha reh () lders in pub I ic com pan ics can prcd ict ri ~" anti avoid ~ u ... t: I i 11 i nl! I ()~se ... h~ ... i ll1i ) I ~1 ... ellin ,L'. IIll'il ... h ; lrl' ~ Over l illil' 111"1\ ' i, \ irtll :llh IllI tlll .llll 1. 11 II ... " :I t

STAKEltOLDER DEBATE AND DIRECTORS' FIDUCIARY D TIES 359

all for the original prov iders of share cap ital. A good rise in the share price

wou ld soon reduce the ri sk rur a shareholder to zero. [I' shares were orig inally

issued at R I per share, ancl the shareholder holds 1,000.000 shares. he could

se ll 500,000 o f the shares when (he price reaches R2 per share to recover his

ori g inal investment. This may sometim es take a while, bUl shareholders are

not excl uded rrom return s on their ori g inal in ves tments as they will normall y

recei ve di vidends when prolits are made. Shareholder ri sks are nowadays also

reduced cons iJerab ly by way of large professional investment rund s and by the rapid ri "e or instillltional shareholders over the last 30 years or so. Fourthly, the compa ny's constitution rorm s a contract between (he company

and its shareho lder" and betwee n the shareholders themse lves. This i" indeed

a special contract that may be amended only by spec ial reso lution. but the

"hareholdcrs ha ve excl usive powers to amend it and thi s pmvides ror considerab le contractual protecti on. Therc is also ample scope ror contraclllal protel'lion or shareholders by way or shareholder agreements. Pi nhly.

,ilthough it i" generall y true that shareholders do not have any prutection

under separa te laws, there are rormidable protections imbedded in most modern economi cs. Apart rrom a very rapid growth or linancial services leg islation in recent times, one can think or the considerable protecti on or

shareholders under company law in terms of statutory deri vati ve ac tions.

continuous disc losure provisions, actions aimed at oppressi ve and unfairl y

prej udicial conduct. inso lvent trading provisions, reck less trad ing provisions. and insider trading provisions, to name but a few.

A rter ex posing the flaws in some or ' the most conv incing' reasons ror retaining shareholder primacy as the norm. one would ha ve ex pec ted that any

company- law model should imlllediately move away rrom that model to one

recogni sing all internal and ex terna l interests equally. Unfortunately it i"

exac tl y the allempt at achie ving that equal recognit ion that ha" kept company la wyers and economists busy since ilt least the earl y I !JJOs anti still we have no clear answer.

4.2 The Theory of Simple Juridical Reality as Basis of Our Merry-go-round Approach

We " hould li ke to propose that th l: starting point should be a very runti ,lnlenta l lega l one: dil'ecto r~ owe their liduciary duties to the company

and to the cO lllpany alonl: as the company is a separatc legal entity rrom the

11l0ment it i ~ reg istered until it i" lieregistel"cd. The company may be a creature or !-, tatut e. but there is hardly any other crea ture as rea l as thi s. One need look

onl y at how the legal staW" o f companies arc defined in cl 12 or the

Companies Bill 2007 to rea li "e how se ri ()u ~ the Legi~ l a ture i" that thi" crea ture or statute be recognised and that it should be allowed to blend into thc thly- tO-c!;IY acti vities of ,,(K iety as ~ea ml ess l y a~ pos"ib le:

' 12 I .t·gal "lalli' or CU ll I p ;lIlil' .....

(11 1 ,"1111111 d . 11." . llId llll h ' lh . 1I 11 1\ ' IIh I llptll . 'Ii1 11lIlj ;1 111 1111':111 \ "It· ~ 'I ... h ' l .. d .. 1' ', I . lh '" III II ,

I.: . I' , 11. 111 11" I • Ildl l ,I II 1111 1 IIIIIp.lIl \

360 (~0071 19 SA Mere LJ

(a) is a jurislic person, which ex i s l ~ conlinuou, ly unlil iI 's name is rel11l1ved from Ihl' COl11panics Regi.>Icr in accordance wilh Ihis ALI: and

Ih) ha, all of Ihe lega l power\ allli capacily of an individu'll, excepl 10 Ihe eX lenl Ihal ',1 j uri,lil' per,on is incapab le of excrci, ing any such power,. or having any such [apacll)'.

The company is represented by severa l interests and th ese include the

interes ls of shareho lders. employees, consumers, the communily and Ihe

environmenl. Thus, rcquiring of direc lors 10 act in good failh in Ihe interesl o f

' the company' cannol nowadays mean any lhing olher Ihan a blend of all these

inlerests, bUI first and foremost Ihey must act in the best inleresl of Ihe

company as ;1 scparale lega l enlil y. The courl s w ill Ihus he in a posilion to

give dilfcrenl we ighl 10 Ihe degree of inleresls. It will al so be appmpriate for a

court l(l consider any (llher rell1edi e" under other leg islation hcfore il allows a

particular inlercsl 10 rely on parlicular co mpany- law rellledies. Such an

approach may we ll revea l Ihal a parlicular interesl is already well calned for

under separale legis lalion .

An inlerest tllal may he prim;lI} at one particular point or lime in the

company's existence, may well hecome secondary at a later stage . Thi s IS a

conlinuing process w hi ch could he compared to a merry-go-round, Ihe

company; many inleresl s arc represenled in Ihis merry-go-rou nd al any

parlicular lime, Just like a merry-go-round, Ihere arc s(lnlel ime" hrief SlOpS 10

lei some parlicipanl s gel off and 10 lake (Jlher partic ipanls on hoard, hUI then

Ihe l1lotion conlinues w ith the participants (interes ts) constanll y movin g up

and down wilhout any rea l lini shing line. The speed of rolation may even

vary, until il Cllmc" 10 a permanent standstill when the company is liquidated.

Bul even Ihen il will require of Ihe COUl'l 10 we igh up the various interesls o f al

Icas l creditors, shan:ho lders and emp loyees. During Ihe ex islence or Ihe

company, Illc direclors wi ll rocus on Ihe interes ts or ' tile company' (t he

lIlerry-go- round), hut they arc not only allowcd , hut are in aClual racl required ,

to ohserve Ille variou, (Jlher inl en.'s ls, moving lip and down jusl like Ihose

w ho arc enjoy ing Ille ride on Ille merry -g(l- r<lund , ve ry c;lrel'ull y when Ihey

ac l. /\I'ILT all , it is required or I he III to ael in good r;li lh ~Ind in Ihe be,,1 inleres l

o r Ille CO llllx lllY as represenl ed by the va rious inleresls in Ihe cOlrlp;lny.

II shuuld he rell1emhered Ihal the Illeaning or ' Ihe cllillpany' olil y hecume"

ohscure ir Ihal lerlll is, r(lr histllric re<l~() II " (sec SJ Naud~ l)ie 1<1'gsl}(J.I'isic' I'WI

dic' M(/(/{,lkc1IJ/Jwlirl'k/l'llr II/{'/ U('slIl/(lere Ve l'll '.l'.I' ill ,t: III/ elie Ill/ertl e M(I(I/skoIJ­

pYl'er/llIl111 ( llJ70) ;11 II.\, rely ing on LS Scaly 'The Direc tor as Trustee '

( 1':>67) C(llI/hridgc' LI X3 ;11 <)0), equated wil h Ihe shareholders co llecti ve ly

and Ihal. cUITcnl ly. is wllat thc legal po~ iti{)n is under Ihe common law. Tllus,

the onl y solution is indeed 1'01' the Leg islatu re to slep in and change Ihe

co mmon law, I'm ()I h erwi~c Ihi s fallacy wi ll be perpeluated.

In our v iew il is unnecessary to g ive any parlicular or we ll -resounding tag

to Ihi s view of the company, othcr Ihan just ~taL ing that it is based ll ll a si mple

juridiea l reality (a ' teorie van eenvoudige juridiese realiteit') iI~ Naudc al ready

pointed out in 1970 (op c it at 18-9). The natural entity theory " tates that

direc tors :Ire the agents o r a corpora lc entil y. Direc t()('<; cou ld 111\'1'''' '111'<' ;IL' I in ;1

1ll:III1lLT Ihat i ~ II I IhL' ,harl'holdl'r', dl' lrilll l' 111 if il i \ III II Il' ;1111 ,1 111.1)'" tt l I Ill'

S'Ti\KEIIOI~DER DEBATE AND DIR'EcT()RS' FIDUCIARY D ' TI ES 36 1

company as a separate lega l entity. Management works for the company and

il s ob liga ti ons to the shareholders are therefore on ly secondary (see 0 Millon

'Theories of the Corpora ti on' ( 1990) Duke U 20 1-262), but need not be

secondary depending on what is requ ired to act bona fide in the best interest of the company.

H ow w ill Ihis be refl ected in leg islat ion ? We propose the following provisions.

First , expandlhe det-initi on o f 'company' to read as foll ows:

. ':rumpany " I11cal~s a juri' lic per~on 10 Ihe eX lelli Ihal il is. or ils aClivilies are. regul'llcd by Ihl.\ Acl In lenns 01 ,\CellOn 7 and Include,. from lime 10 lime. any or all Ihe interests of

«(I ) Ihe: comp:lny s mcmber, as a whole: (h) Ihe company', employee:,: (e) Ihl' company's sllppliers, cuslomer, and olhcrs: (tI) Ihe: commllnily ami Ihe cnvironmcllI 10 Ihe eX ICIll Ihal il cou ld be alTccled by Ihc

n l mp;IIlY\ bll, ines, aClivilies:'

Nex t, replace Ihe ex isting c l 91 or the SOLlih Arr ican Compan ies Bill or 2007 w ilh the rollowing prov ision:

'9 1 Directors' dllty of rare, skill and diligcncc A lilrec~lIr 01 a comp'IIlY IIlU,1 excrci,c hi, powers and discharge hi, dillie, wi lh a dt!"rec of care, , kill allli t1111 )!cncc Ihal a reasonahle person wou ld excrcise if _ "

((I) he is a direclor of Ihe company: and I/J) had Ihe " Imc re,p( IJ"iiJililie ~ wilhin the company a, Ihal director.

Thirdly, add new cll 92 and 93 :

'92 Directors' fidl~dary duties tOll'anls Ihe company ( I I A dlreclur 01 a company I11I1SI discharge hi, uulies in gllOtl failh in Ihe besl inlcresls of

Ihe cllnlp.Il IY .Ind lor a propcr purpose, . (1) A dirl'c lm Ill' a company mllsl nol improperly u\c hi, pmi lion 10 gain an advanlage for

hllll~d l nr illlnlh~r pCf!-inn Of In c..: illI S~ ha rm 10 Ihe l:n lllp~ lJ1y. 1.1) A person whll oblain, informalion in hi, capacily a, a dircc lor or a company niusl Iltli

u\e Ihe 1Il10rm.I!Hln Il.npropcrly III gain advanlage rill' himself or anlilher per\on or 10 cau,e ilarnl III Ihe [olnpany.

'93 Presllmplion in I'm'oll" 01' dircl'lnrs 11. i, presullIcd Ihal .1 direclor fullillcd hi s dilly or C'lre, \ ,ill ;Ind diligencc IIndcr ,e[lion l) I or Ill., Ildllnary dul.L's under sec lioll 92 if Ihe dircelor -

((I) (i) ha, la,en reasonahly dili)!l'nl ' Iep' III become infllfmed aboul Ihc , ubjecl mailer: .Intl .

(Iii tloes nll l ha ~' c ;1 pcrsolla l linanl'ial inleresl in Ihe subjecl mailer: ami (hi lullllkd thc dllty In Ihe " line way as a rca\t llwb1c pcrson in .1 \ imilar po,i lion wOllld do

In l'lll llp;lrahk circllln'I'll lces.·

II is, or cour"e, part icularl y illli orlant to consider w ho wi ll enroree these

duties. We arc or the opinion that any or the parties than may be alfected by

Ihe conduct o r dircclors, should have standing 10 enrorce Ihese duties, but

on ly on Ihe basis o r a sla tulory derivalive ac tion . This will require some aill endments to ci 166 or Ihc Companies Bill or 2007.

A lthough our recommendations Illay seem radical anci althouoh the

proponent, o r the so-ca lled 'enli ghtened shareholder va lue' approach Illay

argue that it will make life imposs ible for directors or even that it wi ll open

the f~oodgates of litiga tion, we do nOI agree. First and foremost, the part y

all eg lllg a hreach wil l bear thc burden or proof {lner the direc lor~ haw made

0111 :1 prilll :1 r:ll ' ie L'aSl' Ih:lt Illey had acted as reCJuired in c l ~n. In CI lll \ iIiITill l'

IVIII'IIII ' I a " 1'1 il ;lIi l'l' ;lI'litl ll \ 1111111" 111' allolVed, 11I1' COllrt will 111l'1I 11 ;11\' I: ,

362 (2007) ) 9 SA Mere LJ

app ly all thc cxcc llcnl safeg u ard~ already imbedde:d in cl 166, including thc

important ri ght o f thc company to apply to the CDurt tll ~el as ide the demand under cl 166(2) on the ground that it i ~ fri vo lous, vcxatious or wholly w ilhout

merit. II mcan ~ th,lt lhere is not only cO llsiderable protcction for the direc tor~

1IIllIcr the s ugge~ tcd cl 9.1, hut the plaintiff wi ll aho have to convince the court that there is indeed an acti on lhat the: plainti ve deri ved from an aclion thc

company would have had if the direc tms or ~ h a reho lde rs wcre prepared to

inslilut e: the aC lion on behalf o f the company.

5 Conclusion

III thi ~ ;Inalys is we co n ~ idcred Ihe sl;lk e: holdcr dehatc. We focll sed

specilicall y Oil rdorlll devc l ()p ll1 en t ~ in the Un iled Kingdom and Soulh A frica,

l30th rei"crred \I I Iwo appm; l c he~ whcn di ~c ll ~~ ing Ihe prolL' ction o f dilfere nl

... 1;lkelllllder~, namel y thL' 'enlightened sh;lrelwlder vallie' approach and the ' plurali ~ t ' approach e~. Ilowevcr, i l is illlport,1I11 10 he aware thai Ihese two

approache~ arc 1101 the on ly rele vant approac he~ regarding cmpor;ltc

"Ilvernance mmkl ~ and spec ificall y not as rar as the protection 01

~Iakeholder~ arc concerned. To analyse the dilferenl th e(l ri e~ or. a III I ; Ipproac he~ to, L'Omp<lny I;IW is a c(} lllpl ex area and eoml1lenlalors hold w idely

di ver"enl v i ew~ on these tlll:mi e~ amI appro;lches . Ilowever, it wa~ argued

Ihal ~e tlll:orie~ of conlpany 1,Iw uSliall y h;lve a shareholder primacy or a

~ lakdlOlde r e mpha~i~. Buth thc Steering (iroup in the United Kingdom a III I

the reforll1 conlll1ill ee ill SOlllh Arrica Irea led Ihe 'enlighl ened shareholder v;due' ;I nd Ihe ' plurali st' , Ipproac he~ as uppo~ ile s. A lkr considering Ihe

rcl"orln docunlenl s in the two .iurisdict iollS, it was clear Ihal hUlh opted I'm the

' enlightened ~ hare holde r v; dLle' approach, ;illlwugh Ihey were applied

dilfe renll y. In the LJ lliled Kin l.!d()1ll Ic !!, isl<lt ioll, dilfcrellt interes t ... (stakehlliders) ,m:

li sled spec ili ca ll y in ' ~ 172 (;j' the ('o lllp,lni es Act , 2()()7. It i ~ cle;II' rrom

~ 172( I ) Ihal I he ' en I ightened ... harehll ider val Lie' approach wa~ the prelcrred

,Ipproach, and thi ~ i ~ , tI ~o confirilled hy ~e \ eral cUllsLlII ;lli ve d oeu ll1elll ~ of the

( 'o illpany I ,aw Rev iew Sleerillg (jrullp. II ()\.\ thi s w ill appl y In pracllce,

howe ver, re lll ; lin ~ lInclear. The Sou th A fri c, ln ('olllp,lIlie~ Bill u f 2()()7 i ~ ullc lea r Oil Ihe prei"c rn.:d

appm; lch and ha~ elenlellls or huth shareholder primacy ;1 III I ~ I a k cho ld e r

pro tect ion. We ... uggested thaI thi s L'oJlfu ,ion must he elim inated. III v iew u l

thi s confu~ ion , \ e recommended dr,lI'l C (;IU ~':S tll he incurporatcd in a rL:v l ~ed

Companie ... Hill. These c lauses arc ha ~ed on the theory that de'>crihes Ihe

company as ,eparate lega l entity as ,I sim ple juridi ca l real il Y, We have

ex panded on thi , thellry hy arguing that the cU lllpany i ~ akin to ,I ll1erry-go­

round, and thus suggested lhat thi~ merry-go- round approach of the company

is currentl y the be~ l way 0 1' recognising the \'ari ous interests or a company w ilhout ne!!lecting the important ro le or the ... harehnlder, III' 1IIl' 1ll\' lllhl' r ... <1 ... :1 whole. It ~c; ln IHl I~ he Iknied Ih;1I a \' tlllll':l ll \ i, .1 " 1',11 .111 ' I, ", II (' llIil \

(10m) IY SA ~ ) <rc LJ

represented by several interesls, including those or shareholders, employees,

in veslors, consumers , lhe comlllunity, and the environment. One therefore

cannot rcquire direc tors to ac t only in thc bes t inl erests or the shareholders collecti vcly whcn acting in ' the best interes ls o r the company', The courts w ill

have to givc dilferent we ighl to the degrce or interests represented in 11

company, These inleresls, and the amount or weighl attached to them, may

differ during the various stages of a company, The protection that lhe!-.e sl,lkeholders recei ve in other legislation may also playa ro le whcn a court

dec ides on the competing interesls of difrerenl slakeholders.

Intellectual Property Rights from Publicly

Financed Research: The Way to Research Hell Is

Paved with Good Intentions

Introduction

COENRAAD VISSER

l/lIi l'l'rsily o(SOlllh A/i-icll

The InlL'llec tual Propert y Rights from Puhlic ly Financed Research Bill ('lhe

Bill') proposes to ddine Ihe ri ght s or the 'S tale in Inlellec tual Prnpert y

deri vcd rrom Puhlicly f<ina nced Resea rch ' (the long litle or the Bill) . In

particul ;II', Ihe Bill propo.~es (lI) 10 introduce a first ownership rule in respcel o r Public ly Finallced Research: (Ii) to crea te a new governmcnt bureaucracy

headed hy thc cenlrali/.ed Nalional Intellectu,t1 Property Manage ll1ent Orli ce;

(e) to impose w ide- ranging di ~c l osure (Ih lig ali o n ~ on Puhliely Financed InslitUlioll s: (tI) to provide 1'01' henefit sharillg hetween in ventors ,Ind Public ly Financed In ~ tituti o n s: ;lIld (el to crea te 'walk - in ' rig ht ~ for the Stat e.

T he Bill is the br,lin child or the well -meaning Departmenl o f Science and Tech no logy ('dst ') , and follo ws on it ~ IIlIellet '/tlll/ fJ/ '()I !erly Nighls ((lid

Plth/icl.\" Fill((lIced Neseu l r h Potie r /Joei linelli (' P() licy Ooellllrellt'), publi shed in July 1006, In the background to the Polin' /)oclllllelll , one can hear the

mantra be ing repealed thai the strongesl rorm or intellec tual propert y prtl tL'c t ion (p,IICll tS) is good rar I he ecollomy (and hy ex tells ioll, <;(lc iely).

t\d tktl III 11i ;II , lli l ' 1'"lin ' /)(1('111111 ' 11 1 ProCL'L'd, ... rnlill till' PI\'llli ... , 111 :1 1 ' 11' 1:11 (' lltlll " 1.-11, " I' .. 1 11 :lll tll l ', I</t-"'; II ('II/ (\: / )/1'\(' 11 '111 111 ' 1111 :11111 111.11 1'> 111.11