Essay on "Shareholder Protection Companies Act 2006"

Essay 7 pages (2048 words) Sources: 7 Style: Harvard

[EXCERPT] . . . .

Shareholder Protection

Companies Act 2006 and shareholder protection

What constitutes unfair prejudice?

The tests of unfairness

Creditor protection

Ashfords (2010). Guide to Unfair Prejudice Against Shareholders

Minority Shareholder Solutions (2012).Test of Unfairness.

http://www.minorityshareholdersolutions.co.uk/16/test-of-unfairness

The corporate constitution in the UK has seen several changes as a result of the adoption of the Companies Act 2006 (Manfield, 2006).The changes affects all forms of corporate engagements within the UK corporate sector. In this paper, we critically evaluate the changes introduced to the corporate constitution by the Companies Act 2006 with particular reference to the balance between shareholder and creditor protection.

The corporate constitution in the UK has seen several changes as a result of the adoption of the Companies Act 2006 (Manfield, 2006).The changes affects all forms of corporate engagements within the UK corporate sector. In this paper, we critically evaluate the changes introduced to the corporate constitution by the Companies Act 2006 with particular reference to the balance between shareholder and creditor protection.

About the Companies ACT 2006

The Companies ACT 2006 is an Act of Parliament in the UK which forms the basis of the UK corporate law. Since its enactment, it has been noted that it has acted as an evolution to the previous laws and has simplified the running of private companies as well as enhanced the level of shareholder engagement (Birds,2007).This cat has the distinction of being the longest Act in the British Parliamentary system. It has 1,300 sections that cover close to seven hundred pages and has a total of sixteen schedules.

The Companies ACT 2006 was implemented in stages and with the very last provision being started on the 1st of October. It effectively replaced the Company Act 1985.The Companies ACT 2006 provides a comprehensive list of code of conduct to be used by the UK's corporate sector and the act made several changes in the corporate law that governed the UL corporate world. The key provisions in the law are the codifications of certain elements of common law principles like the ones that relate to the duties of the director, the implementation of the European Union's Takeover as well as Transparency Obligations Directives, the introduction of new provisions for both public and private companies, the application of a single company law within the UK with the replacement of the two separate systems that existed for the Great Britain and the Northern Ireland.

Corporate social responsibility

The Companies ACT 2006 has several provisions that relates to corporate social responsibility. Corporate social responsibility is important for the peaceful of coexistence between the company with its employees, authorities, shareholders, stakeholders and the general community (Caroll,1999; Aguilera & Jackson,2003; Berle,1932). This is because for an organization to prosper, there is a need for the stakeholders to be involved in almost every aspect of its governance (Freeman, Wicks and Parmar,2004). In regard to corporate social responsibilities, the Companies ACT 2006 makes the following provisions:

Section 171 directs the directors to act within their powers, section 172 urges the directors to promote the firm's success, section 173 urges the directors to exercise an independent judgment, section 174 urges the directors to exercise a very reasonable level of care, diligence and skill, section 175 urges the directors to avoid situations that leads to conflict of interest, section 176 urges the director to avoid accepting any forms of benefits from third parties while section 177 urges the director to declare some level of interest in any transactions that are carried out within the company

Shareholder protection

The relevance of legislation for corporate governance has for a long time been a subject of debate in literature (Pistor, Reiser and Gelfer,2000,p.325).Legal scholars are noted to have suggested that when compared to the competitive capital, managerial labor markets as well as product markets, the role of law in corporate governance is at best of a rather secondary importance as noted by Eastbrook and Fischel (1991).In countries with very strong shareholder protection laws, the rights of the shareholders are clearly specified in the legal systems ( Hart, and Moore,1990). The role of legislation in the protection of shareholder and creditor rights is therefore apparent (Jensen and Meckling,1976) and is clearly outlined in the Companies Act 2006.

Companies Act 2006 and shareholder protection

Shareholders are protected from various corporate evils by the Companies Act 2006.The most common protection to shareholders under the Companies Act 2006 is the protection from unfair prejudice (Marsden, 2011).Some level of protection is provided to the shareholders under statute and the particular part that protects shareholders is section 994 of the Companies Act 2006, a change which acted on the old/previous section 459 of the Companies Act 1985 (Ashfords,2010).

What constitutes unfair prejudice?

According to section 994 of the Companies Act 2006, a member of a given firm may apply to the Courts through petition for an order on the specific grounds that;

a) The affairs of the company are being conducted or have been conducted in a matter which is regarded as unfairly prejudicial to the specific interests of the various members or to some members with at least himself/herself included or b) That a certain actual act or even a proposed one or omission of the firm (with an inclusion of the act or even an omission) is regard to be so prejudicial.

There are two main elements to the specific requirements of an unfair prejudice. These two must be present for a given claim to succeed. They are;

The reported or observed conduct must be prejudicial in a manner or sense that its causes harm or prejudice to a certain interest that is relevant to a give member or to some shareholders

It also must be deemed to be unfair.

The tests of unfairness

The tests for testing if a certain action is unfair prejudice is noted by Ashfords (2010) to be purely objective. This means that it is never necessary for the shareholders who are petitioning to prove or show that anyone acted in a manner which indicates bad faith or even with the intention of creating prejudice. The courts is noted to regard a given case to be unfair prejudice of a hypothetical and reasonable bystander can believe that indeed it is unfair. The fairness in this case is judged in regard of the commercial relationship, in terms of the contractual terms that are main and clearly indicated/contained in the Article of Association as well as in any existing shareholders agreements. The case should therefore begin by effectively asking if the conducts that are pointed out in the shareholder's complaint are in accordance with the powers of the shareholder as well as Articles that are recognized by the board. Minority Shareholder Solutions (2012) indicated that the best protection for the shareholders is the according of appropriate protection in the relevant Articles themselves. This means that is a conduct is deemed to be in accordance with the specific Articles to which the various shareholders have agreed., then it will be extremely difficult for the shareholder to succeed with a given unfair prejudice petition. It is worth noting that even if a given conduct is deemed not to be in accordance with the relevant parts of the Articles, it does not automatically render a given conduct unfair. This is because technical as well as trivial infringements of the relevant parts of the Articles may never give rise to a solution under section 994.

The situations/scenarios in which the rights of a given shareholder may have been Prejudiced.

According to the Companies Act 2006, a given conduct must be regarded as unfairly prejudicial to the interest of the petitioners in their capacity as certified members of a given company. In other words, they must be shareholders. The courts however adopts a broader perspective of what may be treated as his or her interest as a certified member of the given company. The use of the "unfairly" word enables the Court to duly consider the wider and yet equitable considerations as well as recognize that the certified members of a given company have rights as well as expectations that may not necessarily be part of the company's Article of Association.

The types of conducts that may be regarded as fairly Prejudicial

The concept of unfair prejudice is noted by Birds et al. (2010) to be a rather flexible one with an obvious lack of an exhaustive definition. There are however certain categories of conducts that may be deemed to amount to an unfairly prejudicial conduct. The categories are however open-ended (Birds et al.,2010,p. 1155).The common examples of acts that may constitute an unfairly prejudicial conduct are; the exclusion of a given shareholder from the management in situations where there is a legitimate expectation of his or her participation, the diversion of the core business of a company in which the company's majority shareholder has vested interest. The awarding of excessive benefits to the majority shareholder. Abuse of power also adds to the list.

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