Unraveling the True Meaning of “The Interests of the Company” (Part 1)
by Jason Cheong Kah Lok ~ 17 December 2020
Contributed by:
Jason Cheong Kah Lok
Email: jck@thomasphilip.com.my
As lawyers, we often tell the board of directors that being directors, they must act in the best interest of the company.
This is in line with Section 213(1) of the Companies Act 2016 which provides that a director of a company shall at all times exercise his powers in accordance with the Act, for a proper purpose and in good faith in the best interest of the company.
However, have you ever wondered what does it really mean by “interests of the company”?
Nourse LJ in the 1987 Court of Appeal case of Brady v Brady [1987] NLJ Rep 898 said:
The expression ‘the interests of the company’ is one which is often used but rarely defined. It seems quite likely that it is sometimes misunderstood and it is possible that it has slightly different meanings in different contexts.
To add on that, Justice Rich in the High Court of Australia case of Mills v Mills BC3890123 had aptly said that
The phrase ‘bona fide for the benefit of the company as a whole’ no doubt tends to become a cant expression in these matters but is not yet a shibboleth.
In Malaysia, the landmark Federal Court case of Tengku Dato’ Ibrahim Petra Tengku Indra Petra v. Petra Perdana Bhd & Another Appeal [2018] 2 CLJ 641 held that a company’s interests may not have the same meaning in all cases. There can be situations where different interests exist and some may even overlap. Where different interests exist, each interest will generally be accorded a different degree of prioritization. In the end, the “interests of the company” is still a question of fact.
Having said that, what then interests constitute “the interests of the company”?
According to Ford’s Principles of Corporations Law 10th Edition, page 318
“…Various entities could be considered to be part of “the company”, namely existing members, future members, creditors, beneficiaries under a trust administered by the (trustee) company and employees, customers, contractors and the community.” (Wow! So many interests!)
Hence based on the above and for the purpose of this article, we will focus on the following interests one by one and more importantly on how do they qualify as being the “interests of the company”.
Note: The interests of the company’s employees and the interests of the company’s creditors will be discussed in Part 2 of this article.
Interests of the company itself as a legal entity
We all know that upon incorporation, a company acquires a legal personality separate from that of its member a.k.a a separate legal entity (see Section 20 of the Companies Act 2016).
And such corporate personality allows a company to have full rights, powers and privileges to exercise all the functions of a body corporate such as having the full capacity to carry on or undertake any business or activity including, to sue and to be sued, to acquire, own, hold, develop or dispose of any property, and to do any act which it may do or to enter into transactions (as per section 21 of the Companies Act 2016).
In other words, a company is an artificial legal person in the eyes of the law. Hence, the company as a legal person is perfectly capable of having interests on its own independently.
In relation to the breach of the director’s duty in endangering the interests of the company as an independent entity, the examples would be as follows:
- The director attempts to divert or expropriate business opportunities that were supposed to be enjoyed by the company to himself or other related parties;
- The director makes secret profits for himself;
- The director exposes the company to liabilities to secure his own personal interests; or
- The director prioritizes the advancement of interests of third parties (for example in cases of nominee director, the nominator) over that of the interests of the company.
Interests of the current members
According to LS Sealy on Cases and Materials in Company Law (3rd Edition, at page 271), the ‘interests of the company’ may not have the same meaning in all cases. It may refer to the interest of the corporate body as a separate entity or to those of the shareholders collectively, and in some cases, the interests of the company as such may not be directly involved at all. For example, in regard to the allocation of a surplus between different classes of shareholders.
This is because the interests of one group of shareholders may not be the same as the interests of another group of shareholders.
Where the acts of the director give rise to a competition of interests between then majority and the minority shareholders, it is common that the interests of the minority shareholders will be the endangered interests. And when such actions affecting the interests of the minority shareholders are not justified, they might amount to actions not in the best interests of the company as a whole.
What about when the interests of the company compete with the interests between different groups of shareholders at the same time?
In these cases, there might be justification to put the interests of the minority as being subordinate to that of the company itself even if such acts are to the benefit of the majority.
In the Privy Council case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, Lord Wilberforce relied the judgement of Latham CJ in Mills v Mills (1938) 60 CLR 150 which held that:
“The question which arises is sometimes not a question of the interests of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of the ‘interests of the company’ must be applied.”
Based on the above proposition, does it mean that if there is a conflict between the company’s interests with the shareholders’ interests, the company’s interests take precedence?
The answer can be derived from the judgment of Arden J in Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155 whereby it was held that the primacy of the company’s interest as an entity takes precedence but it does not absolve the directors from having to act fairly between the different classes or groups of shareholders with differing interests.
Interests of future members
Case laws seem to suggest that the interests of future shareholders are also included in the consideration of shareholders’ interests and as such those interests are also interests of the company.
Quoting Justice Megarry in the 1970 case of Gaiman v National Association for Mental Health [1970] 2 All ER 362:
“The question, then, is whether that power of deprivation of membership has been exercised by the council in good faith for the purpose for which it was conferred. Such a power is, I think, plainly conferred in order that it may be exercised in the best interests of the association. The association is, of course, an artificial legal entity, and it is not very easy to determine what is in the best interests of the association without paying due regard to the members of the association. The interests of some particular section or sections of the association cannot be equated with those of the association, and I accept the interests of both present and future members of the association, as a whole, as being a helpful expression of a human equivalent.“
Here, the directors are required to balance the short-term interest of existing shareholders against the long-term interests of future members.
Conclusion
It can be seen that the interests of the company itself as an entity and the interests of the shareholders are within the ambit of “the interests of the company”.
Accordingly, since section 213(1) of the Companies Act 2016 requires a director to act in the best interest of the company, in doing so, not only the director must serve the interests of the company itself as an entity, the director must also serve other interests, among others the interests of the shareholders of the company.