Directors' Duty to Act in the Best Interests of the Corporation: 'Hard Cases Make Bad Law'

Abstract

Directors’ statutory duty to exercise their powers ‘in the best interests of the corporation (company)’ can be found in s 181(1)(a) of the Corporations Act 2001 (Cth). On numerous occasions the courts, both in the United Kingdom and Australia, have held that there it is also a common law duty for directors to exercise their powers ‘in the best interests of the corporation as a whole’ and that ‘the corporation’ means ‘the corporators (shareholders) as a general body’. In this article, the focus will be on these phrases and the aim is to establish whether these phrases create potentially competing duties for directors. The various interpretations of these duties have resulted in considerable complexity and legal uncertainty as far as directors’ duties are concerned. The UK case of Greenhalgh v Arderne Cinemas Ltd and the Australian High Court case of Ngurli Ltd v McCann will be analysed and their impact on many other cases will be dealt with in some detail.

Throughout this article the significance of the corporation as a separate legal entity will be emphasised and it will be argued that directors owe their duties towards the corporation as a separate legal entity. It follows that directors can no longer prioritise shareholder interests unless these interests align with the best interests of the corporation as a separate legal entity. Several other third party interests are represented in the corporation as a separate legal entity and it will depend on the particular circumstances to what extent these interests need to be considered when directors fulfil their duties towards the corporation.

Keywords: corporate law, common law duty, shareholders, corporators

JEL Classification: K10, K12, K20, K22