lecture 5&6 (1) Flashcards
What is the role of the board
Delaware section 141: “the business and affairs of every corporation … shall be managed by or under the direction of a board of directors
in short we can say;
1) running the company
-Monitoring (non executives, supervisory board)
-Executing the strategy (executives, management board)
2) Execute duties as described bythe (company) law and not doing what is forbidden by the law/jurisprudence
3) representing the company
Board duties
1) duty of care: take reasonable care
-including risk management (internal controls)
-business decisions are risky by nature
Business judgement rule
2) duty of loyalty: directors are considered fiduciaries
Duty of care example UK
1) a director of a company must exercise reasonable care,skill and diligence
2) this means the care, skill and diligence that would be exercised by a reasonable diligent person with:
a) the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company and
b) the general knowledge, skill and experience that the director has
a) objective minimum standard
b) beyond minimum standard
Duty of care (example germany)
section 93(1) AktG: directors have to exercise the care of a conscientious and diligent manager
Analogy for supervisory board members (section 116 AktG)
Also objective minimum and boyond minimum standards
section 93(1) AktG (BJR)
management board members shall not be deemed to have violated their duty of care if they prove that, at the time of taking a business decision “they had good reason to assume that they were acting on the basis of adequate infomration for the benefit of the company.
however, unlike the US, no Presumption in favor of the directors
Board duties
Business judgement rule
Usually very high standards in all jurisdictions
Hindsight bias experiments (for instance, Kamin and Rachlinski)
Heuristics
Duty of care (example delaware)
DCGL does not specify the duty of care
BJR: a presumption that in making a good business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company
1) standard of review: courts wil not reveiw business decisions if the directors acted on an informed basis and in the honest belief that the action taken was the best in the interest of the company
2) standard of conduct: “ the fiduciary duty of due care requires … directors… use the amount of care which ordinarily careful and prudent men would use in similar circumstances, and consider all material information reasonably available
Main conflicts of loyalty
1) a director has a personal interest in a transaction that the company enters into (self-dealing)
2) director competes with a company (corporate opportunity)
a) owning or managing competing business
b) valuable opportunity for personal use
General consensus on duty of loyalty: hands of the substance of a directors decision if the director has no personal interest in the transaction, uses procedures that are generally accepted as adequate under the circumstances adn reaches a decision that is not plainly irrational
Duty of loyalty (example UK)
section 172(1) CA 2006: Duty to promote the success of the company
1) a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to
a) the likely consequences of any decision in the long term
b) the interest of the companys employees
c) the needs to foster the companys business relationships with suppliers, customer and others
d) the impact of the companys operations on the community and the environment
e) the desirability of the company maintaining a reputation for high standards of business conduct and
f) the need to act fairly as between members of the company
To whom are the duties owed
To “the company”
shareholder vs stakeholder models
US: shareholders
UK: shareholders and a little bit to other stakeholders (enlightened shareholder model)
Continental europe including germany: institutional view of the company, including its various constituencies
Dutc hcase law and the corporate purpose ABN Amro case and Cancun case
In performing its duties assigned by law or by the articles of association, the corporate board should put the interests of the company and the associated enterprise first and take the interest of all parties involved, including those of the sharholders, into account in its defcision-making
In performing its duties assigned by law or by the articles of association, the corporate board sould put the interests of the company and its affiliated enterprise first. What that interest means depends on the circumstances of the case. As a rule, the companys interest is mainly determined by promoting the continued success of the company
–> holistic vision of the corporate purpose
The corporate purpose debate
Friedman 1970
That responsibility is to conduct the business in accordance with their desires, which will generally be to make as much money as possible while conforming to the basic rules of the society, bboth those embodies in law and those embodied in ethical custom
> sharholder primacy model
The corporate purpose debate US
Americans deserve an economcy that allows each person to succeed through hard work and creatiity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth
Case: akzso nobel - OK 29 May 2017, JOR 2017/261
The american competitor PPG made several takeover bids to the listed dutch company AKzo nobel in 2017 and requested the management of akzo nobel to enter into negotiations. The board and the supervisory board refused the bids and the negotiations, to the dismay of some (anglo-saxon) activist shareholders
Actions of the shareholders:
Call to EGM to remove the chairman of AKzo nobel
Akzo nobel refused to organize and EGM
Shareholders started an inquiry procedure before the dutch enterprise chamber
Asked for immediate measures and investigation of the decision making
Questions about the case:
1) to what extent can shareholders of Akzo nobel force the board to negotiate with PPG about the takover offer
(informal activism(letters), callEGM/use shareholder proposal right, Start court proceedure, remove board members: majority needed)
2) How is the corporate purposeinterpreted in the akzo nobel decision?
Confirmation cancun ruling: the companys interest is mainly determined by promoting the continued success of the company (3.12) + explicit reference to DCGC and stakeholder model
ClientEarth v Shell’s BOD 2023
shell is seriously exposed to the risk of climate change, yet its climate plan is fundamentally flawed. In failing to properly prepare the company for the net-zero transition, shells board is increasing the companys vulnerability to climate risk, putting its long term value in jeopardy
