4.4.2.1 Common law constraints on controlling shareholders/directors

The aim of s. 994 is, in essence, to constrain the behaviour of company officers, directors and controlling shareholders. It came into existence because the common law had failed to provide the minority shareholders with adequate protection in this respect. We first have a look at the common law experience in this area.

A point of increasing academie debate in the UK is whether a shareholder in a company owes any fiduciary duty or duties of good faith to any other shareholder (or the company) in his/her dealings in relation to the company. The traditional doctrine was that no such duty was owed; a shareholder was free to vote or act in such a way as he considered fit in his own interests without any duties to the other shareholders,1 and he/she was only required to consider the best interests of the company in case of amendment of the articles.2 As summarized by Davies, "the common law does not perceive the controlling shareholders to be in a fiduciary position towards non controlling shareholders, so that a basis for the individual shareholder to restrain the power of the majority as it reveals itself in shareholder decision making is not available."3

Directors are fiduciaries, but only to the company, not to individual shareholders.4 The Law Commission has attempted to impose an obligation on directors to "act fairly as between different members",5 but the CLR in its final report interpreted such fairness between members as a means to achieve success for the members as a whole, not an independent requirement for directors to take special care of minorities.6 This approach "leaves the law on directors' duties playing no significant role in the protection of minority shareholders."7 Moreover, to challenge a breach of director 's duties, shareholders were required to bring exclusively a derivative action. As discussed in 3.4.2, derivative actions are not always efficient in protecting minority shareholders, especially those in a close company.8 All in all, the protection provided by the common law for minority shareholders was limited and a far-reaching mechanism for minority protection was needed.9