Members vs Directors of company: who wins?

The directors are bestowed with powers to act in the best interest of the company. Directors are given such powers in the article of the association of their company. Often they collide with the direction of the members, shareholders and creditors as to whether or not the directors are acting for the best interest of the company or vice versa. Quite often the members and the directors will have different views in determining what is best for the company. Since then, the law have been developed in order to distinguish the powers between the directors and the members. At the early historical development of company law where division of powers between the members and the directors may concern, director seen as nothing but agent. The General meeting and the board of directors are integral part of the company.

Basically we will have to look into the article of association to see the powers of the members and the directors, but in default situation, we have to refer to article 73 Table A of the Companies Act if only the company follows Table A.

Director acts in accordance with the resolution passed by Board of Director’s meeting. Directors are empowered to act on behalf of the company since the company is only an artificial person. The shareholders who have invested their money in the company are given voting power on certain matters reserves to them under the company’s articles of association, the Companies Act and the general principles of law to determine the company’s course of conduct. Meanwhile Board of Director involve in the management of company’s affairs. However conflicts always occur between Board of Director and the shareholders in deciding what the company capable of. The issue here is whose direction will prevail? In resolving this issue, company law have divided the authority of these two entities of a company by referring to the provision in Companies Act 1965 and the articles of association. Management powers has expressly been given to the Director as determined by the articles and memorandum of association , with specific statutory provisions requiring certain conduct of director to be subjected to shareholder’s approval. Management power of Board of Director is bestowed under Article 73 of Table A, Fourth Schedule, Companies Act 1965 which provides that:

The business of the company shall be managed by the directors who may pay all expenses incurred in promoting and registering the company, and may exercise all such powers of the company as are not, by the Act or by these regulations, required to be exercised by the company in general meeting, subject, nevertheless, to any of these regulations, to the provisions of the Act, and to such regulations, being not inconsistent with aforesaid regulations or provisions, as may be prescribed by the company in general meeting; but no regulations made by the company in general meeting shall invalidate any prior act of the directors which would have been valid if that regulation has not been made.

The potential situation where conflicts may arise are in the cases involving commencement or cessation of legal proceedings by the company against harm done towards the company itself or whether the board can commence winding up proceedings without the concurrence of the shareholders is at general meetings.

The effect of the distinction of powers between the Board of Director and members in general meeting is well illustrated in Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame. In this case the court refused to order the directors to follow the instructions of the shareholders at general meeting to dispose of the company’s assets. The company’s articles vested management powers on the directors. Where the articles of the company have expressly conferred general power of management and specific power to directors, then, in the absence of specific statutory provisions, requiring shareholders’ approval, the director have exclusive power of management. The decision in Cunningham’s case regarded the members in general meeting as ‘constituting the company’ and the directors as their delegates or agents. Generally the court declined to lift the veil, so as to identify a subsidiary with its holding company, partly on the ground that the control of the affairs of the subsidiary was assigned to its directors. The court is reluctant to regard the members as the leader of the company since this will lead to a conflict of jurisdiction in cases where members do not agree with the Directors. The reason why the court does not give acknowledgment to the members is to hinder the members from obstructing the job of the directors. They believe that if once directors have been appointed, the members shall give all powers to the directors, subjected to certain limitation as provided in their article of association, to allow the directors to act according to their own standard.

The main reason for the division of powers between directors and members was explained by Buckley L.J. in Gramophone and Typewriters Ltd v. Stanley in these words:

“…even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company affairs. The directors are not servants to obey directions given by the shareholders as individual; they are not agents appointed by and bound to serve the shareholders as their principals. They are person who may by the regulations be entrusted with the control of the business, and if so entrusted hey can be dispossessed from that control only by the statutory majority which can alter the articles.”

In the case of Quin & Axtens v Salmon the Company two managing directors, Salmon and Axtens held between the bulks of the company’s ordinary shares. Article 75 of the articles provided that the business of the company should be managed by the directors, who might exercise all the power of the company subject to such regulations (being not inconsistent with the provision of the articles) as may be prescribed by the company in general meeting. Article 80 stated that no resolution of a meeting of a directors having for its object the acquisition or letting of certain premises should be valid if either Salmon or Axtens dissented. The directors resolved to acquire and to let various properties, but Salmon dissented. An extraordinary general meeting was then held at which the members by the majority passed similar resolutions. The House of Lords upholding the decision of the Court of Appeal held that the member resolutions were inconsistent with the articles and granted an injunction restraining the company to act on them.

Another case to be illustrated is John Shaw & Sons (Salford) Ltd v Shaw . In this case as part of the settlement of a dispute concerning sums owing to the plaintiff company by Peter, John and Percy Shaw (three brother who were shareholders in and directors of the plaintiff company), the article was altered so as to hand over all control of the financial affairs of the company and the management of its business to three independent person known as ‘permanent directors’. Two of the brothers, however later failed to accept certain other provisions of the settlement, and as a result it was resolved at the meetings of the permanent directors that the present action should be instituted against them. But before the hearing of the suit to the shareholders held an extraordinary meeting, at which a resolution was passed directing the board to discontinue the action forthwith. Du Parcq J disregarded the shareholders’ resolution and gave judgment for the plaintiff company.

Greer L. J made this observation:

“A company is an entity distinct alike from these shareholders and its directors. Some of its power, May according to its articles, is exercised by directors; certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise power.”

Greer L. J. in the same case suggested that the only way in which the general body of the shareholders could control the exercise of the powers vested by the articles in the directors was by altering the articles, or, if opportunity arose under the articles, by refusing to re-elect the directors of whose actions they disapproved. The general meeting by itself could not usurp the powers which by the articles were vested in the directors any more than the directors could usurp the powers vested by the articles in the general body of the shareholders.

The above cases may be taken to established that, where directors in pursuance of a power conferred upon them have instituted litigation in the company’s name, the members in general meeting may not interfere direct that the proceedings to be discontinued. But in the converse case, where majority of members have instituted or consented to the institution of proceedings in the company’s name, and the director object to theirs being discontinued the law is less clear. Certainly of the directors themselves defendants or if the allegation is that they are party to wrong against the company the rule in Foss v Harbottle appears to allow the majority members the ultimate say and even, where the directors are themselves majority members, to permit a minority member to bring derivative action. The company in general meeting may act if the board of directors are incompetent or unable to decide because of deadlock for instances to exercises a power conferred upon them. In such circumstances, the General meeting will act on behalf of the Board of Directors in determining the course of the company.

A situation may exist where the members may take over the board’s power. For instances, when there is a serious disagreement amongst boards members that resulted in deadlock in company’s management. In the case of Baron V Potter the two director of the company were not in speaking terms so that effective board meeting could not be held. The plaintiff Canon Barron had requisitioned a members’ meeting at which additional directors had purportedly been appointed. The defendant objected that the power to make such appointments was vested by the company’s articles in the directors. It was held that, in views of deadlock, the power in question reverted to general meeting, and so the appointments were valid.

Can the members insist the directors to follow the wishes of the members?

The board of Directors have the right to exercise powers of the company except those the act itself to be exercised in the general meetings. In most English cases, by ordinary resolutions members cannot take away the power of the Board of Directors. However if the member wishes to oust the BOD, they can do so by ordinary resolution.

That is why, according to Professor Lingam of Law Faculty, MARA University of Technology stated that if you can remove the directors by ordinary resolutions, why must you need special resolution to ask the BOD what to do?

However it is to be understood that the purpose of this provision is to prohibit the interference of the members for the future benefit of the company. If we allow much interference between members and directors, the interest of the company will be prejudiced.

In a Singapore case, the case of Credit Development Pte Ltd v IMO Pte Ltd, the court ruled that ordinary resolution is sufficient to oust the power of the directors. However according to Prof. Lingam, Malaysia has not decided yet on which direction to follow since Malaysian courts have yet to encounter with such case.

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3 Responses to Members vs Directors of company: who wins?

  1. Pingback: On “ReadingLaw.Wordpress.Com” « Ilang in the Sampan

  2. Zainuddin says:

    Very refreshing article written in a simple language that is easily understood. Well done! Look forward to reading more of your articles. Thank you.

  3. Raymond Chu says:

    This is more like a topic on derivative action which is an action derived from the a cause of action which a company has, rather than inherently a right claimed by the shareholders. Under the common law, minority shareholder can bring an action on behalf of the company where the company does not take action on the basis that the legitimate rights of control in the company subsists with the wrongdoer who is all out to stop the company from taking action.

    The new provisions under s. 181A to s.181E Companies Act 1965 enable the complainant to apply for leave of Court within 30 days notice in writing to the directors of their intention to apply for leave under s.181A. By so doing, the directors are not taken by surprise and have sufficient notice and time to prepare for all eventualities.

    The setback is when there is a wrongful dissipation of company’s assets and by giving 30 days notice, even upon obtaining leave of Court, the risk of losing out on time and hope of recovery of loss company funds lies with the complainant as the days pass pending the issuance of the interim injunctive relief sought.

    On one hand, good faith must be demonstrated on the part of the complainant. On the other hand, undeniably, the risk passes along with the burden to the complainant when it is really for the prima facie best interest of the company and the shareholders that within this 30 days, proper account be taken and supervision be conducted by the Registrar of Companies to avoid anymore unnecessary mishaps.

    This in my opinion, is the real basis for any amendment and in making the best approach to the rule in Foss v Harbottle especially where two crisis occurs almost simultaneously ie. first, when the fault lies beyond the control of the company’s ability to ratify itself anymore and next, this is especially when the perpetrators of fraud still exists in control of the company. Given the choice, evasion and exhausting the company funds at this stage will be almost vertually unavoidable.

    Hence, while the interim injunction is a relief to prevent loss to the company, it is by far a low standard of protection to the complainant. Will leave of Court be sufficient to access the remedial process of recovery of dissipated funds and is sufficient investigation carried out able to detect the whereabouts of such fund in the knowledge that such perpetrators may have almost depleted their own resources as well.

    This is unfortunately, the last attempt allowed and on top of this, by obtaining leave of Court, without which, even, the commencement of derivative action becomes impossible up till this stage.

    Perhaps, it is time, the law on locus standi can be revamped and the relationship between company and shareholders can be reviewed to encourage more checks and balances to make company matters more transparent before it becomes too late for any remedial action be taken in the best interests of both company and members’ shareholders’ rights.

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