The interest of the company (sometimes company benefit or commercial benefit) is a concept that the
board of directors
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
in corporations are in most legal systems required to use their powers for the commercial benefit of the company and its members. At
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
, transactions which were not ostensibly beneficial to the company were set aside as being
void
Void may refer to:
Science, engineering, and technology
* Void (astronomy), the spaces between galaxy filaments that contain no galaxies
* Void (composites), a pore that remains unoccupied in a composite material
* Void, synonym for vacuum, a ...
as against the company.
Background
An early illustration of this principle is to be found in ''
Hutton v West Cork Railway Co'' (1883) 23 Ch D 654, where the
English Court of Appeal
The Court of Appeal (formally "His Majesty's Court of Appeal in England", commonly cited as "CA", "EWCA" or "CoA") is the highest court within the Courts of England and Wales#Senior Courts of England and Wales, Senior Courts of England and Wal ...
held that the paying of a gratuity to employees prior to their dismissal was an improper exercise of the powers of the company, because the company was no longer a going concern, and thus stood to obtain no benefit (and no furtherance of its objects) through the payment of the gratuity; as
Bowen LJ
Charles Synge Christopher Bowen, Baron Bowen, (1 January 1835 – 10 April 1894) was an English judge.
Early life
Bowen was born at Woolaston in Gloucestershire – his father, Rev. Christopher Bowen, originally of Hollymount, County Mayo, b ...
memorably remarked: "there are to be no cakes and ale except such as are required for the benefit of the company." (The decision itself is reversed by statute).
Any transaction which the directors enter into which is
outside the powers of the company (and thus outside the scope of their authority) may nonetheless be ratified by the
shareholders
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal owner ...
of the company, and will thereby be binding upon the company, see for example under
English law
English law is the common law legal system of England and Wales, comprising mainly criminal law and civil law, each branch having its own courts and procedures.
Principal elements of English law
Although the common law has, historically, be ...
, ''
''
983
Year 983 ( CMLXXXIII) was a common year starting on Monday (link will display the full calendar) of the Julian calendar.
Events
By place
Europe
* Summer – Diet of Verona: Emperor Otto II (the Red) declares war against the Byza ...
Ch 258.
Modern developments
The rule is generally seen to be particularly harsh towards both third parties and against directors, who could be regarded as being in
breach of their duty merely by acting with what others might regard as common human decency. Where the company's property could not be recovered from the third party, the directors would be personally liable to recompense the company.
There were also concerns that running companies ruthlessly for the financial benefit of the shareholders had a countervailing cost, making directors unwilling to participate in programmes that were beneficial to the community generally, or to the environment. It also meant that companies became much less willing to make donations to political parties, which may have had more impetus in bringing about legislative change than concern for communities or the environment.
Some legal systems have now abrogated by statute the rule that as against third parties the transaction may be void if it has insufficient commercial benefit to the company.
In some countries, statutes now expressly provide for the directors to consider interests other than the pure financial interests of the shareholders.
However, in some jurisdictions there are proposals to make the power to act otherwise than for the financial benefit of the company even wider. For example, in the United Kingdom, the
Companies Act 2006
The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law.
The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
, requires that directors have to consider the impact of their actions on a much wider range of stakeholders. The Act requires a director "to promote the success of the company for the benefit of its members as a whole", but sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are:
* the likely consequences of any decision in the long term
* the interests of the company's employees
* the need to foster the company's business relationships with suppliers, customers and others
* the impact of the company's operations on the community and the environment
* the desirability of the company maintaining a reputation for high standards of business conduct, and
* the need to act fairly as between members of a company
The proposed new duties have been subject to some criticism, both from those who argue that the new duties do not have sufficient bite, and also from those who fear that it diverts directors' focus from what it is that they are meant to be doing (viz., generating profits
and there are fears of widespread litigation, and increase in director's insurance premiums. However, because the new duties are expressed in non-imperative terms, and there is no sanction, the likelihood is that although they will empower the board of directors to take decisions that do not appear to directly financially benefit the company, they are unlikely to ever be required to do so.
Distinction from other legal concepts
Conceptually, it is important to distinguish failure of a transaction for want of corporate benefit from other related legal concepts. These include:
*''Failure of consideration'': Under
contract law
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
in most common law legal systems, to be
enforceable
An unenforceable contract or transaction is one that is valid but one the court will not enforce. Unenforceable is usually used in contradiction to void (or ''void ab initio'') and voidable. If the parties perform the agreement, it will be valid, ...
a contract requires both parties to provide
consideration
Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions.
The court in ''Currie v Misa'' declared ...
(i.e. something of value). However, the consideration does not need to be equal, and the gratuity given in ''Hutton v West Cork Railway Co'' would still have failed for want of corporate benefit if, for example, the company had allowed employees to purchase company property at a discount.
*''Transactions at an undervalue'': Although most examples of failure for want of corporate benefit involve transactions which were either a gift, or were made at a substantial undervalue, the concept is different in purpose and effect from provisions of insolvency law which prohibit
undervalue transaction
An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors. This can occur ...
s at a time when the company is insolvent.
[The key distinctions are for whose benefit the rule is intended (the shareholders on the one hand, and the creditors on the other) and the result (a transaction that fails for want of corporate benefit returns the property to the company generally, and, if the company is insolvent, would be subject to any ]security interest
In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...
such as a floating charge
A floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulator ...
in the normal way. But in many jurisdictions, sums recovered relating to a transaction at an undervalue are ring-fenced for the unsecured creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor.
In the event of the bankruptcy of the debtor, the unsecured creditors usually obtain a ''p ...
s. Transactions that fail for want of corporate benefit fail entirely, but transactions at an undervalue usually only require the enriched party to disgorge the extent of the undervalue
See also
*
UK company law
The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...
*
US corporate law
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance ...
Notes
{{Reflist, 2
References
*
Business law
Corporate law
United Kingdom company law