Electronic copy available at: http://ssrn.com/abstract=2147519

Shareholder Fiduciary Accountability: No Duty to the Minority

*Robert Flannigan

Judges have concluded that shareholders have no status fiduciary duty to their

corporations. They have also concluded that majority shareholders have a status

fiduciary duty to minority shareholders. Both conclusions are wrong.

The current understanding of the fiduciary accountability of corporate actors is defective in

certain respects. Two of the more critical deficiencies are the ideas that shareholder voting power

is not constrained by fiduciary accountability and that majority shareholders are accountable to

minority shareholders. Both ideas crystallized in the jurisprudence of the nineteenth century as a

result of the failure of some judges to appreciate the legal consequences of entity status. I will

first explain in conventional terms why shareholders are accountable as fiduciaries by reason of

the access to corporate assets they acquire in the performance of their will definition function. I

will then trace the missteps in the early decisions that produced the modern conceptual disorder.

Speculative discourse on competing theories of the nature of the corporation played almost

no part in the early shaping of corporate law. Instead the development of the legal framework

was driven by a gradual comprehension of the contours of the pragmatic but powerful idea that a

corporation is a legal person in the same way or sense as a natural person. That development

unfortunately went astray in certain respects and has yet to recover. I will revisit the conceptual

consequences of entity status and outline the fiduciary principles that should have been

fashioned. I bear in mind that, while we employ entity status to do conceptual work, we must be

content as a community with the consequences it generates. The entity abstraction must not

impair our aggregate social welfare as we conceive it over time. That said, quite apart from the

intellectual economy of an accessible abstraction, the proper application of the entity construct

would largely restore conceptual symmetry between corporate and general conventional

fiduciary principles, and coincidentally transfer to the former the recognized universal legitimacy

of the later. There is nothing that credibly suggests that such symmetry is inappropriate.

The Modern Position

The present understanding of corporate fiduciary accountability at the governance level

may be briefly outlined. English courts have concluded that directors perform the functions of

agents and employees and are subject to the attendant fiduciary regulation.1 It is also clear that

directors owe their status fiduciary duty solely to the corporation – they are not accountable on a

status basis to shareholders. The corporation itself is not per se a status fiduciary to shareholders

or to any other constituency.2 As for shareholders, it is said that they do not have status fiduciary

* University of Saskatchewan. 1 Attorney General v Wilson (1840) 1 Cr. & Ph. 1, 41 E.R. 389; Aberdeen Rail Co. v. Blaikie Brothers (1854) 23

L.T. 315 (H.L.). 2 There was language in early cases that possibly suggested that corporations held their property as trustees for their

shareholders. See Child v Hudson’s Bay Company (1723) 2 P. Wms. 207, 24 E.R. 702; Harrison v Pryse (1740)

Barn. C. 664, 27 E.R. 324. The modern view, that corporations are not status fiduciaries, became clear in the

nineteenth century. See for example Bligh v Brent ((1837) 2 Y. & C. Ex. 268 at 296, 160 E.R. 397) (“[T]he property

Electronic copy available at: http://ssrn.com/abstract=2147519

2

duties to each other or to the corporation.3 In particular, they supposedly are entitled to exercise

their voting powers free of fiduciary regulation. Usually in the same breath, however, it is

conceded that the majority of shareholders must not oppress the minority. Apart from that,

shareholders are accountable on a status basis when they act in a separate status role or capacity

for the corporation, such as when they choose to perform the functions of directors, even though

not formally appointed,4 or when they serve as litigant, solicitor, banker or investment advisor.

5

Status accountability does not exhaust fiduciary regulation. Accountability will also arise

where on the facts an actor assumes a limited access to the assets of another. Thus, for example,

directors may find themselves accountable to shareholders, corporations may be accountable to

shareholders, shareholders may be accountable to each other, and each may be accountable to

third parties involved in corporate matters. The formal status of each actor in these illustrations is

wholly irrelevant. Their access, rather than their status, attracts the regulation.6

The forgoing summary requires elaboration or correction in various respects.7 The most

significant correction relates to the status accountability of shareholders qua shareholder. It is

quite proper to conclude that shareholders normally have no status fiduciary accountability to

each other. The standard arrangement between or amongst them is not one of limited access.8 It

is incorrect, however, to conclude that shareholders have no status fiduciary accountability to

their corporations or, specifically, that they are completely free to vote as they please. A status

duty arises to the extent that shareholders are engaged in defining the will of the corporation.

This duty is found in the cases, but it has been misconstrued or misconceived as a duty owed by

the majority to the minority.

The Division of Power

One must first comprehend the physical character of the corporate governance structure,

where power is “divided” between the board of directors on the one hand and the shareholders in

general meeting on the other. This “division of power” management structure is not unique to the

corporation.9 The structure is a potential practical solution wherever larger numbers of actors

entrusted is money; the corporation may do what they like with it, and may obtain their profit in any way they please

from the employment of their capital stock.”). 3 Phillips v Manufacturers’ Securities Limited (1917) 116 L.T. 290 at 296 (C.A.) (“But members of a company

voting at a general meeting properly convened have no fiduciary obligation either to the company or to the other

shareholders.”); Peters’ American Delicacy Co. v Heath (1939) 61 C.L.R. 457 at 482 (H.C.) (“[shareholders] do not,

in voting at a meeting, exercise any power of a fiduciary character.”) and at 504 (“[shareholders] occupy no

fiduciary position and are under no fiduciary duties.”); Kuwait Asia Bank E.C. v National Mutual Life Nominees Ltd.

[1991] 1 A.C. 187 at 217 (“A shareholder does not by reason only of his position as shareholder owe any duty to

anybody.”). 4 Yukong v Rendberg (No 2) [1998] 2 BCLC 485 (Q.B.); Re Kaytech International plc [1999] 2 BCLC 351 (C.A.).

5 For example, shareholders who litigate on behalf of a corporation assume the status accountability of an agent.

Consider Barrett v Duckett [1995] 1 BCLC 243 (C.A.); Cooke v Cooke [1997] 2 BCLC 28 (Ch.). 6 Consider Coleman v Myers, [1977] 2 N.Z.L.R. 225 (C.A.), a frequently cited, but weak, example.

7 See generally R Flannigan, “The Adulteration of Fiduciary Doctrine in Corporate Law” (2006) 122 LQR 449.

8 The financial nature of the arrangement is that shareholders contribute capital to the corporation for its benefit.

That is, the corporation normally acquires open access to subscribed capital. As will shortly appear, the limited

access that shareholders do acquire is to the assets of the corporation (consisting in part of their own former capital). 9 Another term commonly used to describe the basic arrangement is “centralized management.” This kind of power

division is rarely equivalent or comparable to the divided constitutional authority of a federal state. The general

3

combine to pursue collective undertakings. The significant costs of continuously coordinating the

preferences of the members of larger groups are reduced by assigning ordinary management to a

smaller body of actors, and leaving to the whole group only those matters considered especially

important (including the power to retake control of ordinary management). The structure in that

respect is universally efficient for group endeavors, whether incorporated or not, or whether

seeking profit or not.10

Of particular relevance here is the structure of the joint stock company,

the immediate predecessor of the statutory registration corporation.11

Joint stock companies,

unless they were formally incorporated, were general partnerships.12

They typically were

physically different from traditional fraternal partnerships in that they had numerous partners

(called “shareholders”), most of who were engaged only as inactive investors.13

Predictably their

larger numbers and investor detachment drove their promoters to adopt the centralized

management structure,14

with a limited number of partners acting as a “board of directors” to

manage the business subject to the abeyant overriding control of all of the partners in general

meeting.15

It must be emphasized that this was an economic imperative, the need recognized by

promoters and their advisors then and now to efficiently coordinate the activity of a larger group.

It was thereafter the role of the courts, and later the legislatures, to define the legal character of

this division of power.

The rule established in partnership law was that each partner was an agent of the body of

partners. That rule was internally modified in joint stock companies by restricting agency power

meeting potentially is capable of dominating all aspects of the business because it almost always possesses the

power to amend the corporate constitution, and the powers to elect and remove directors. Consider also Foster v

Foster [1916] 1 Ch. 532; Re Duomatic Ltd. [1969] 2 Ch 365. 10

See Crocket v Tantallion Golf Club [2005] CSOH 37 at para. 29. See generally R. Flannigan, “The Liability

Structure of Nonprofit Associations: Tort and Fiduciary Liability Assignments” (1998) 77 Can. Bar Rev. 73. 11

See generally William Scott, The Constitution and Finance of English, Scottish and Irish Joint Stock Companies

to 1720 (Cambridge: University Press, 1912); Armand DuBois, The English Business Company After the Bubble

Act, 1720-1800 (New York: Commonwealth Fund, 1938). 12

See Myers v Perigal (1852) 2 De G. M. & G. 599, 42 E.R. 1006; Re Sea Fire and Life Assurance Company (1854)

3 De G. M. & G. 459, 43 E.R. 180 and John Collyer, Law of Partnership (2d ed.) (London: Sweet & Maxwell,

1840) book 5, c. 1. James LJ insistently expressed the contrary view in Baird’s Case (1870) 5 Ch. App. 725 and Re

European Assurance Society (1875) 1 Ch. D. 307 (C.A.). He was forced to employ the unhelpful notion of a “quasi”

corporation. 13

The other main physical difference was that shares frequently were freely transferable. Consider in that regard the

idea that a sharp division of power is reflected in the nature of the information that commonly is available to

members of the two bodies. The standard default position is that shareholders are not entitled to see detailed

financial data or the minutes of board meetings. The impetus for such default rules likely was the creation of

transferable shares (which permitted competitors, creditors and others to become shareholders) and the consequent

need to effectively contain the distribution of sensitive information. 14

Leaving potential ultimate control with the general meeting serves implicitly as a bonding mechanism. Passive

shareholders would regard the exposure of the constitution to amendment (and of the directors to replacement) as a

form of investment protection offered by promoters to bond the business and its directors to the investor agenda. 15

Consider the structures described in Baldwin v Lawrence (1824) 2 Sim. & St. 18, 57 E.R. 251; Walburn v Ingilby

(1833) 1 My. & K. 61, 39 E.R. 604. The structure described in Benson v Heathorn ((1842) 1 Y. & C.C.C. 326, 62

E.R. 909) seemingly on the face of the judgment was an outlier in that ultimate control apparently was not reserved

to the general meeting. See also Collyer, supra note [ ] at 743-44 (and the sample deed of settlement in Appendix

11); DuBois, supra note [ ] at 291-92. Some structures included trustees to formally hold the property of the

business and to pursue actions involving that property. That trust apparatus was of no consequence for the division

of power because the trustees invariably were bare trustees or nominees fully controlled by the board or general

meeting. See DuBois, supra note [ ] at 217-20.

4

to the board of directors.16

The members of that board undertook to act in the best interests of the

partnership as a whole – as joint agents acting for joint principals.17

The parallel default fiduciary

obligation was that those directors, as either agents or partners, were not entitled to entertain

personal conflicts or benefits.18

Partners who were not directors were required under partnership

law to act in the interests of the collectivity in the equivalent sense that unauthorized personal

conflicts and benefits were proscribed.19

Prior to the advent of general incorporation legislation in the nineteenth century, corporate

status was available only pursuant to an exercise of the Crown prerogative or the authority of an

act of Parliament. While most joint stock companies remained unincorporated, some

undertakings chose to acquire corporate personality.20

No alteration of physical structure,

however, was involved. The process was to design (or retain) the same divided power

arrangement and then have that arrangement confirmed by the sovereign or Parliament.21

That

requires emphasis. The incorporation event did not involve any fundamental transformation of

physical structure. The basic structure simply was equally efficient for corporations.22

That did

not mean, however, that the legal character of the undertaking remained unchanged.

Incorporation introduced a distinct legal entity to the arrangement – producing different legal

consequences.23

The main early attraction of the corporate form, it has been noted, was not

limited liability.24

Rather, it was the transactional conveniences associated with separate entity

status (the ability to acquire/hold property, and to litigate, in the corporate name).25

Those

16

See for example Burnes v Pennell (1849) 2 H.L.C. 497 at 520-22; Re Sea Fire and Life Assurance Company

(1854) 3 De G. M. & G. 459 at 477, 43 E.R. 180. 17

Brown v Andrew (1849) 18 L.J.Q.B. 153. 18

The duty was imposed by law. See Benson v Heathorn (1842) 1 Y. & C.C.C. 326 at 341, 62 E.R. 909; Re Norwich

Yarn Company (1856) 22 Beav. 143 at 158, 52 E.R. 1062. 19

See Featherstonhaugh v. Fenwick (1810), 17 Ves. Jun. 298, 34 E.R. 115; Fawcett v Whitehouse (1829) 1 Russ. &

M. 132, 39 E.R. 51. 20

See the statutes authorising specific incorporations at (1696) 7 & 8 Wm. 3, c. 31; (1710) 9 Anne, c. 21; (1719) 6

Geo. 1, c. 18. 21

The specific division of power for a given company was determined by the idiosyncratic preferences of the

promoters and the economic leverage of sought-after investors. Further, as today, there were particularised share

caps, vote caps, voting thresholds, and situational voting disqualifications. None of those idiosyncrasies affected the

essential character of delegated will definition. 22

While the general meeting remained latently dominant, there was a progression in the decisions towards what

might appear as a sharper division of power. See Exeter and Crediton Railway Company v Buller (1847) 16 L.J. Ch.

449; Automatic Self-Cleansing Filter Syndicate v. Cunninghame [1906] 2 Ch 34; Marshall’s Valve Gear Company,

Limited v Manning, Wardle & Co., Limited (1909) 1 Ch. 267; John Shaw & Sons (Salford) Ltd. v Shaw [1935] 2

K.B. 113 (C.A.); Scott v Scott [1943] 1 All E.R. 582 (C.A.); Breckland Group Holdings Ltd v London and Suffolk

Properties Ltd [1989] BCLC 100 and Paul Davies, Gower and Davies’ Principles of Modern Company Law (8th

ed.) (London: Sweet & Maxwell, 2008). That ostensible progression had no analytical implication for the fiduciary

accountability of shareholders. They are accountable for whatever will definition power they possess. 23

On the tort consequences, see R. Flannigan, “The Personal Tort Liability of Directors” (2002) 81 Can. Bar Rev.

247 at 259-61. 24

DuBois, supra note [ ] at 89-104, outlines the early motivations. As to the early understanding of the liability of

shareholders, consider Salmon v Hamborough (1671) 1 Chan. Cas. 204; Re York-Buildings Company (1740) 2 Atk.

56, 26 E.R. 432, and the views of Edward Warren, Safeguarding the Creditors of Corporations (1923) 36 Harv. L.

Rev. 509. 25

See for example the incidents of incorporation described in the statute incorporating the Greenland Company

((1692) 4 & 5 Wm. 3, c. 17, art. 7). Consider also Stewart Kyd, The Law of Corporations (1793) at 2-13 and Cecil

Carr, Select Charters of Trading Companies (London: Selden Society, 1913) at xiv-xx. As to perpetual succession as

5

conveniences or attributes were regularly recorded in incorporation instruments (charters, letters

patent, private Acts)26

as motivating considerations well before limited liability appeared.27

Beyond that, there were no indications in the instruments that the division of power was a unique

or necessary corporate attribute, or that it somehow assumed a different nature as a result of the

incorporation event. It was not until the second half of the nineteenth century, following the

enactment of the 1844 Joint Stock Companies Act, that the courts would have reason to more

closely examine corporate divided power arrangements.28

Corporate Will Definition

Constitutional divisions of power specify who is to define the will of an organization.29

A

person or body granted authority to determine the action of another on a given matter expresses

the will or intent of that other on that matter. For joint stock companies, the usual arrangement

was that the managing partners jointly or by majority defined the will of all the partners on

ordinary management matters. For matters reserved to the general meeting, there could be

different thresholds. Typically the will of the majority of partners constituted the will of the

partnership as a whole, and bound every partner.30

As noted, the division of power in a corporation between the board of directors and the

shareholders in general meeting is not fundamentally physically different from that of the joint

stock company. There is, however, a legal change in the beneficiary of the exercised powers. The

introduction of the corporate entity displaces the shareholders as owners of the undertaking.

They are no longer principals in relation to the business.31

The corporation alone is the source

and beneficiary of the authority to make decisions granted to the board and to the general

meeting. Both bodies (the board and the general meeting) now exercise their powers to define the

an attribute of corporate status, appreciate that it generally may be replicated by contract (by making the investment

transferable, and binding on estates). 26

Charters or letters patent literally were the documents that contained the expression of the royal prerogative or (as

with a private Act) the authority of Parliament. 27

Limited liability appears as an explicit incorporation rationale in the latter half of the eighteenth century. See the

statutory incorporations at (1764) 4 Geo. 3, c. 37; (1786) 26 Geo. 3, c. 106; (1791) 31 Geo. 3, c. 55. It is not clear

when the conceptual link between entity status and limited liability became widely recognised or accepted. The early

common perception seems to be that shareholders had limited liability simply because the sovereign or Parliament

declared it. 28

7 & 8 Vic., c. 110. The introduction of general incorporation legislation had no special conceptual significance for

fiduciary accountability because the nature of the authority did not differ across the different means of acquiring

entity status. Further, apart from abstract principle, the actual process was to register the same basic arrangement

used in joint stock companies and in applications for charters or special acts. 29

The bulk of the power granted to a board or general meeting involves will definition. In the case of the board, the

general management power has a broad operation. In the case of the general meeting, the amendment power defines

the will of the corporation as to its own constitution, including the allocation of power and the mechanisms of the

exercise of power. The powers to elect and remove directors determine which persons actually express the corporate

will. Shareholder powers to approve particular matters (amalgamations, continuations, sales of assets, dissolutions)

obviously involve the direct expression of corporate will. 30

In the absence of an agreed lesser threshold, the partnership agreement could be altered only by unanimous

consent. See Const v Harris (1824) Turn. & R. 496; 37 E.R. 1191; Re Vale of Neath and South Wales Brewery

Company (1849) 1 De G. & Sm. 750, 63 E.R. 1280; Re Norwich Yarn Company (1856) 22 Beav. 143, 52 E.R. 1062. 31

See John Shaw & Sons (Salford) Ltd. v Shaw [1935] 2 K.B. 113 at 134 (C.A.) (“A company is an entity distinct

alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by

directors, certain other powers may be reserved for the shareholders in general meeting.”).

6

will of the corporation. Neither the board nor the general meeting express the will of the

shareholders, as was the case with the unincorporated joint stock company. Today few axioms

are better established in English law than that a corporation owns its property in its own right and

that shareholders have no interest in that property. To the extent the board and general meeting

are authorized to determine how that corporate property will be deployed, they necessarily act on

behalf of the corporation, and not on behalf of the shareholders.

Virtually all of the practical utility of the corporate form notoriously depends on the

conceptual distinction between the corporate person and those persons shrouded by the corporate

veil. The transactional and litigation conveniences were mentioned above. Shareholder limited

liability is equally a conceptual illation or consequence of entity status.32

Contracts entered into

by the agents of the corporation bind only the corporation. The acceptance of contractual

obligation is the act of the corporation, and not its shareholders. The corporate tort immunity of

shareholders also is premised on entity status. Shareholders remain liable for torts they commit

personally, but are not liable for the torts of the corporation. Relative to the joint stock company,

their former vicarious liability as principals was dissolved by the interposition of the new

corporate principal. Further, while there are benefits to corporate status, there are also burdens

for shareholders.33

These too are premised on the separate entity status of the corporation. In

short, entity status matters. Specifically, a corporation is not to be equated with its shareholders

individually or as a group.34

A corporation is a separate person with a separate will.

How then must we characterize the will definition function of the board and the general

meeting? In what conventional capacities are the two bodies acting when they formulate

corporate will? A preliminary observation is that the default position is that each body only

possesses authority as a defined group or unit.35

Each body normally must hold proper meetings

or use specified processes to produce valid decisions.36

Neither directors nor shareholders may

act individually without formal authority from the board or the general meeting, even if de facto

they actually dominate the corporation. Another preliminary observation is that we are not

concerned with the mechanical execution of the decisions of the board and general meeting. The

execution of a decision (for example, any requisite communication or implementation) occurs

only after its formulation. That does not mean, incidentally, that will definition does not occur

below the level of the board or the general meeting. If permitted, the will definition function of

each body may be delegated to agents or employees. However, while that may be of some

consequence for other purposes (e.g. the criminal liability of a corporation), it is not of present

32

Though it begs the policy question of what justifies limited liability. 33

Burdens of corporate status, like benefits, may be situational. Corporate taxation illustrates the point. Corporate

level taxation may a burden (benefit) relative to individual taxation, but it may be a benefit (burden) relative to rates

applied to other types of firms. 34

Incorporation produces a novel “shareholder” statutory status. Because one cannot equate the distinctive statutory

status of shareholders with their pre-corporate or extra-corporate status, one cannot regard the corporation itself as

merely a transparent label for the aggregated shareholders. 35

Brown v Andrew (1849) 18 L.J.Q.B. 153; Re Homer District Consolidated Gold Mines (1888) 39 Ch. D. 546; Re

Portuguese Consolidated Copper Mines, Limited (1889) 42 Ch. D. 160 (C.A.); Re Haycraft Gold Reduction and

Mining Co [1900] 2 Ch. 230; Barron v Potter [1914] 1 Ch. 895; John Shaw & Sons (Salford) Ltd. v Shaw [1935] 2

K.B. 113 (C.A.). 36

There is a common law exception for shareholders who unanimously agree on a matter even though there is no

valid shareholder meeting. See Re Duomatic Ltd. [1969] 2 Ch 365; Schofield v Schofield [2011] EWCA Civ 154.

7

interest.37

The concern here is only with fiduciary accountability at the level of the board and

general meeting.

It is first necessary to understand how the board and the general meeting acquire their

authority. There are those who insist that neither the board nor the general meeting can acquire

authority from the corporation because it has no physical competence or presence. They then

conclude that the board and the general meeting must themselves constitute or “be” the

corporation, or its “organs,”38

within their respective spheres of authority. That is a wholly

unnecessary conceptual complication.39

The board and the general meeting acquire their

authority at the point of corporate creation. The authority or will definition structure of a

corporation is established at the outset by its own act of constitution and the fiat, or act of

recognition, of the state (with the attendant general and corporate governance). Like a natural

person, a corporation is entitled to confer authority on others to make decisions on its behalf. It is

akin or equivalent to the creation of a power of attorney. There is no conceptual need to deem the

board or the general meeting to be the corporation. Their authority comes from the corporation at

the instant of its creation, and every instant thereafter, by its constituting instrument, pursuant to

governmental license (and, if necessary, default capacitation).40

Additionally, the power to alter

the authority structure in the future typically is assigned by the same instrument to the general

meeting. The power to amend the original authority arrangement is placed by the corporation

within the will definition authority of the shareholders. That is the conventional formulation of

the animation of the authority of the board and the general meeting.41

What legal characterization(s) attaches to this dimension of the relation between the two

bodies and the corporation? Are the bodies acting as agents or employees? The functional

distinction between agents and employees is that agents bind their principals to others both

37

Will definition corresponds with mens rea. Accordingly, a corporation should be liable whenever the body (or

delegate) actually authorized to make the decision (originally or by delegation) has the relevant mens rea. See

Citizens’ Life Assurance Company, Limited v Brown [1904] A.C. 423, Meridian Global Funds Management Asia

Ltd. v Securities Commission [1995] 2 A.C. 500 (P.C.). 38

Consider the view expressed in the eighteenth century that the corporate seal was the hand and mouth of the

corporation. See Rex v Bigg (1717) 3 P. Wms. 419; 24 E.R. 1127; Beverley v Lincoln Gas Light and Coke Company

(1837) 6 AD. & E. 829, 112 E.R. 318. 39

One judge using “organ” terminology innocuously (merely to describe an authorised body) properly observed that

the two organs “take decisions on behalf of the company” and that organ members might “be disqualified from

participating by voting in expressing the corporate will.” See Smith v Croft (No. 2) [1988] Ch. 114 at 184-85. See

also Peter Watts, Directors’ Powers and Duties (Wellington: LexisNexis, 2009) at 32-34, for a critical assessment of

“organic” theory. 40

Most incorporation statutes specify default capacities for each body. Judges create others. Consequently, where

authority is not otherwise allocated by the incorporators, the statutory and judicial terms will apply. Analytically, by

implicitly acquiescing to the default terms, the corporation is choosing that part of its authority structure. 41

The original authorization of directors by their corporations was recognized in Foss v Harbottle (1843) 2 Hare

461 at 490-91, 67 E.R. 189 (“[directors are] individuals whom the corporation entrusted with powers to be exercised

only for the good of the corporation.”). As to the position of shareholders, see P. Watts & F. Reynolds, Bowstead

and Reynolds on Agency (19th ed.) (Sweet & Maxwell, 2010) 1-024, at 15 (“Equally, to the extent that some of the

functions of shareholders in general meeting involve participating in decision making on the company’s behalf with

a view to alteration in the company’s legal position, they act as co-agents. The source of their authority is the

incorporation statute and the company’s constitutional documents.”).

8

internally and externally42

while employees perform internal production tasks.43

On that

distinction, the members of the board and the general meeting might be characterized as

employees.44

Will definition may be understood as solely a matter of internal production

because, as noted above, there is a substantive difference between making, and then executing or

implementing, a decision.45

For example, a board or a general meeting decision to approve a

transaction with a third party must thereafter be implemented by an agent (perhaps one of the

directors) actually binding the corporation to the transaction. Prior to that execution, no agency

function is involved (no interaction with others to bind the corporation). Alternatively, the board

and the general meeting might be understood as each having the dual character of agent and

employee, with the applicable character in a given instance dependent on the content of the

matter on which the corporate will requires expression. For example, the general meeting would

be acting in an agency capacity when it considered whether to approve a voidable contract and in

an employee capacity when it had to decide whether to proceed with the development of a new

product.

For our purposes there is no need to further investigate the agency or employment

alternatives, or to choose between them. Nor is there any need to assess whether the directors and

shareholders serve in some other nominate capacity, such as trustee, when performing their will

definition function. Our analysis may proceed solely as an abstract authority analysis, without

descending to what may be regarded as complicated intersecting default proxies for authority

(agent, employee, trustee).46

The board and the general meeting define the will of a corporation

because they are authorized to do so. The analysis may properly remain at that conceptual level.

Will definition is but one incident of the respective positions that directors and shareholders

assume. Directors, for example, may have separate conventional agency duties to individually

execute corporate decisions. Shareholders for their part have certain duties (and numerous

personal rights) that exist independently.47

Will definition is distinguishable in that it engages

directors and shareholders as bounded units (as board and general meeting) to render corporate

intent. Consider in that regard that will definition is an authority issue for a variety of relations.

The roles of trustee, partner and guardian, for example, raise comparable questions. To what

extent are these actors authorized to exercise or furnish the will of others? In each case the

42

Workers act in an agency capacity externally, for example, when they bind their firm to contracts with third party

suppliers and consumers. They act in an agency capacity internally or structurally when they bind the firm to

contracts with employees or exercise their delegated authority within the production unit. 43

Many workers perform both production and authority tasks (they are subject to authority in certain respects and

exercise their own delegated authority in other respects) and consequently may be characterized as either an agent or

employee for a given legal purpose. For some matters, the dual character of a worker makes no difference, as for

example in the status ascription of vicarious liability. 44

In the case of directors, it might be thought odd that they may be characterized as employees for will definition

purposes. Today there is a broad assumption that directors are not to be regarded as employees for the purposes of

employment law (labour standards, collective bargaining). Historically there are also cases where without analytical

development it is asserted or implied that directors are not employees. See for example Re Leicester Club & Country

Racecourse Company (1885) 30 Ch. D. 629. In the case of shareholders, “employee” status for will definition

seemingly never has been contemplated. 45

Will definition may attract accountability where it involves a criminal, tortious or fiduciary breach, but the mere

act of producing a given decision does not involve binding the corporation to others. 46

Though discarded, the seeming relevance of the categories does imply that the relation is fiduciary in character

given that each category attracts fiduciary accountability. 47

Statutory shareholder duties include returning distributions in certain circumstances and not oppressing other

shareholders.

9

assessment of authority with respect to a given matter normally is a particularized application of

general authority principles – the main principle being that each actor must act in accordance

with the authority conferred on them.48

An authority analysis, in other words, usually is

independent of the status of the actor involved. Like care and loyalty, the principles of authority

analysis are general and generic. A will definition relation is thus properly characterized simply

as an authority relation, where abstract principles of authority determine validity.

Both the board and the general meeting receive their will definition authority from and for

the corporation – and not from or for the shareholders. That is the unambiguous consequence of

entity status. The corporate entity authorizes the two bodies to determine how its property will be

employed. That creates a classic limited access arrangement. The board and the general meeting

have access to the assets of the corporation solely to benefit the corporation. Accordingly, on

principle, the members of each body should be subject to the parallel fiduciary accountability

that regulates all limited access arrangements.49

In this instance that accountability is to the

corporation. Within the ambit of their will definition function, directors and shareholders must

avoid unauthorized conflicts or benefits.

The conclusion that both directors and shareholders are fiduciaries to the corporation is

confirmed by the variability of the power division between the board and the general meeting.

The powers initially allocated to each body will vary according to the wishes of the parties

involved. Placing a particular aspect of will definition with the board clearly subjects the

exercise of that power to fiduciary accountability. Choosing to instead assign the same power to

the general meeting should not alter the accountability consequence for the corporation. The

protection afforded to the corporation should not magically disappear merely because a different

set of persons has been tasked with the function of expressing its will about the employment of

its assets in the conduct of its business.

In some quarters the forgoing may be regarded in part as radical analysis. There will be no

concern with the conclusion that directors are accountable as fiduciaries to their corporations.

Instead the objection will be that, while shareholders are exposed to fact-based accountability to

anyone, the cases indicate that they have no default accountability to their corporations by reason

of their status alone.50

Shortly, however, it will become clear that courts do impose a status

fiduciary accountability on shareholders acting collectively, albeit without framing it in fiduciary

48

The general principles may be distilled from a number of formally discrete (but broadly redundant) doctrines

concerned with the exercise of authority, including the “proper purpose” and “fraud on a power” doctrines, and the

basic rules of agency. General principles of joint authority are also applied in the law of unincorporated associations

and partnerships. 49

While the nominate duty to act in the best interest of the corporation applies to the board and general meeting as

defined bodies, the fiduciary duty of each member of each body is personal. Only members who are conflicted need

abstain from voting. On principle, where a transaction is tainted by unauthorised benefit or conflict, the transaction

is voidable subject to third party interests, and all members who gained – even if they did not vote or were not part

of the discrete dominant group, or dissented – must disgorge any collective gain produced by the collective vote. 50

The objection is partly correct. Only shareholders who exercise a will definition function or otherwise have

limited access to corporate assets (confidential information, equipment, etc) would be accountable on a status basis.

Shareholders who do not have access do not have the coincident status duty. On the other hand, because they are

generally bound by shareholder will definition, all shareholders will have to accept the legal correction of a misuse

of power.

10

terminology, and without directing the duty to the corporation. Before proceeding to that

analysis, however, it is convenient to further clarify the position of corporate shareholders.

Incorporation, it was noted earlier, changed the owner (principal) status that shareholders

had as members of joint stock companies. They lost that status to the corporation. They

continued to own their shares as personal property, but no longer the business or its assets. They

assumed a new statutory status under their retained “shareholder” label. That status often

includes the contractual right to receive profit on a residual basis. It is that equity participation,

along with rights to elect and remove directors, that appear to suggest to some that shareholders

remain the “real owners” of the business and therefore ought to enjoy that status whenever it

suits their purposes.51

It should be evident, however, that the “real owner” argument constitutes a

direct rejection of the entity status of the corporation. If we take entity status seriously, as judges

do (subject to piercing considerations), there can be no default shareholder ownership of the

business. Specifically, neither the board nor the general meeting can owe a status duty of loyalty

to the shareholders. The common function of the two bodies is to advance corporate prosperity.

Shareholders may individually prosper as a result, but only as a consequence of corporate

prosperity. Shareholder gain is reflected gain, realized derivatively.52

Shareholder injury from the

opportunism of other shareholders is equally only a reflection of injury to the corporation.53

What then does it mean to say that shareholders are entitled to exercise their votes in their

personal interest? Shareholders are free to vote to register their own preferences as to what is in

the best interest of the corporation. Those preferences will be informed by their individual

circumstances and prospects. That generally is not objectionable. Shareholders are entitled to

express divergent views over the direction and policy of the enterprise given their different

sensibilities and capacities, and their contemplation of how their own reflected gain will be

advanced through the prosperity of the corporate undertaking. The one limitation imposed by

fiduciary accountability is that shareholders in general meeting are not entitled to subjugate the

interest of the corporation to their own interests. They cannot exploit their access to corporate

assets through will definition to selectively enrich themselves. They cannot compromise the will

definition apparatus by using it to seek gain outside of or collateral to corporate gain. Their

freedom to vote is constrained to corporate advantage or aspiration. No shareholder need tolerate

the machinations of other shareholders who seek to use the will definition power to engineer a

personal benefit under the guise of corporate benefit.

As will appear in the next section, the courts framed their regulation of shareholder

opportunism somewhat differently. They were led astray by the factual domination of the

majority in the disputes before them. In their view, the majority/minority bifurcation gave rise to

51

The default financial position of shareholders is similar to that of debt holders. Both have capped exposures that

prevent recourse to other assets. The position of holders of preference shares may be functionally equivalent to the

position of debt holders. See R. Flannigan, “The Debt-Equity Distinction” (2011) 26 B.F.L.R. 451. 52

Arguably this is the point Latham CJ laboured to articulate in Mills v Mills (1938) 60 C.L.R .150 at 163-65. It was

problematic, however, for him to conclude that sometimes the issue is what is fair as between different classes of

shareholders, rather than what is in the interest of the corporation. Unless shareholders negotiate unique treatment,

they accept the consequences of both the board and the general meeting acting to advance corporate prosperity.

Shareholder relations inter se are just another aspect or element of the management of the business. 53

While reflective loss is not recoverable, shareholders may recover personal losses. See Johnson v Gore Wood &

Co. [2002] 2 A.C. 1. Consider also Waddington Ltd. V Chan Chun Hoo Thomas [2008] HKCU 1381.

11

a duty on the part of the majority to not abuse the minority. That was a false step. It will be

appreciated that the deliberations of decision-making bodies frequently decompose into majority

and minority views. Recognizing that reality, majority rule (or some other threshold short of

unanimity) will often be adopted as a suitable mechanism to define the consensus threshold

required for action and to mitigate holdout problems. That, however, creates or amplifies a

separate problem. The opportunism mischief is latent in majority rule. Shareholders who accept

(subscribe to) majority rule simultaneously accept a greater exposure to the opportunistic

impulses of other shareholders. An organized or spontaneous majority may choose to divert the

value of corporate assets for its selective gain, directly or through amendable directors, using its

majority power either to approve or ratify the diversion. The courts have regarded that as an

abuse of the minority. It should be evident, however, that it is the corporation that is disserved.

The will definition authority it granted to the shareholders is exploited. Its assets are diverted.

Minority shareholders are abused only reflectively by reason of the effect of the vote on the

value of their shares. It cannot be that the minority is owed the very duty that all shareholders

(including minority shareholders) individually owe to the corporation. Where the majority uses

its power opportunistically, the remedy for the minority is to endeavor to have the corporation

pursue those shareholders who breached their duty to it, or to bring a derivative action on its

behalf. That is what the judges ought to have said. Consider what they did say.

Early Conceptual Failure

Historically many judges struggled in their comprehension of the effect of incorporation on

fiduciary accountability. In particular, in the years following the introduction of the 1844

legislation there was a failure to understand the conceptual transition that occurred when a

partnership converted itself into a corporation.54

That is apparent from the persistent assertions

that directors owed their fiduciary duty to shareholders. Sir John Romilly, for example, did not

comprehend the change in fiduciary accountability that took place when the shareholders were

displaced as principals by the corporate entity.55

In a number of cases beginning in 1845 he

maintained that directors managed the business for the benefit of the shareholders. In York and

North-Midland Railway Company v Hudson he stated that directors were to exercise their

judgment “as they may consider best for the interest of the company; that is, for the interest of

the shareholders of the company.”56

That suggests that he conceptually equated the position of

54

That failure was attributable in part to the fact that the 1844 statute (7 & 8 Vic., c. 110) did not expressly articulate

the fiduciary accountability consequences of incorporation for shareholders. Certain phraseology in the statute even

implied the continuation of the status of shareholders as proprietors, and therefore implicitly as beneficiaries of the

fiduciary duty of directors. For example, in s. 25 dealing with the effect of incorporation, it was stated that “and

thereupon it shall be lawful for the said Company, and they are hereby empowered, as follows; that is to say…To

sue and be sued by their registered Name (emphasis added).” That kind of language was itself attributable to the fact

that the statute operated by requiring the registration of the partnership agreements or deed of settlements of joint

stock companies, where shareholders were regarded correctly as principals (partners). That acceptance of the

economic structure of the applicants had been the practice for earlier incorporations by royal prerogative or

parliamentary authority. 55

There were few earlier focused statements of the fiduciary accountability of directors of corporations created by

royal prerogative or parliamentary authority. Consider Charitable Corporation v Sutton (1742) 2 Atk. 400, 26 E.R.

642; Ex parte Lancaster Canal Company (1832) 1 Mont. & Bligh 94. 56

(1845) 16 Beav. 485, 51 E.R. 866 at 496.

12

corporate shareholders with that of the shareholders (partners) of joint stock companies.57

Other

judges expressed comparable views.58

There were, however, coeval developments that indicated a clearer understanding of the

consequences of incorporation. In 1843, in Foss v Harbottle, Sir James Wigram explained that a

corporation is a separate legal entity that alone is entitled to pursue its directors for breaching

their fiduciary duty.59

The corporation is the principal to whom the directors owe their duty, and

it decides in each instance whether to enforce that duty. There are “exceptions” to that principle,

but they are predicated on the right of the corporation, or involve personal rights of shareholders.

Then, in 1846, in The Queen v Arnaud, it was explicitly confirmed that shareholders are not

owners of the corporate property.60

And in 1854 the House of Lords in Aberdeen Rail Co. v

Blaikie Brothers confirmed that the duty of directors was to promote the interests of the

corporation.61

In short, the assertions that corporate directors owed a duty to shareholders were

opposed from the outset by the principles that have since been recognized as definitive of

corporate status. The problem was that those principles were not directly set against the

assertions of Sir John Romilly and the isolated remarks of the other judges until the turn of the

century.62

When it came, however, the change was emphatic. Two cases notoriously formalized

the English position.

The first decision, in 1896, was Salomon v A. Salomon and Company Limited.63

The House

of Lords there stressed full recognition of the distinct legal personality of the corporate form. The

arguments that had succeeded at trial and in the Court of Appeal were that the corporation was

either the agent or trustee of Salomon. Both arguments were rejected by the House. Lord

Halsbury stated that “once the company is legally incorporated it must be treated like any other

independent person with its rights and liabilities appropriate to itself.”64

Lord Herschell

disclaimed the “popular” perception: “In a popular sense, a company may in every case be said

to carry on business for and on behalf of its share-holders; but this certainly does not in point of

law constitute the relation of principal and agent between them.”65

Lord Davey similarly

deprecated the “loose” understanding:

I am at a loss to see how in either view taken in the Courts below the conclusion follows

from the premises, or in what way the company became an agent or trustee for the

57

See also Great Luxembourg Railway Company v Magnay (1858) 25 Beav. 586, 53 E.R. 761; Williams v Page

(1858) 24 Beav. 654, 53 E.R. 510 and the report of the appealed Romilly MR judgment in Re National Provincial

Marine Insurance Company (1870) L.R. 5 Ch. App. 559 at 562. 58

Ferguson v Wilson (1866) L.R. 2 Ch. App. 77; Wilson v Lord Bury (1880) 5 Q.B.D. 518; Albion Steel and Wire

Company v Martin (1875) 1 Ch. D. 580. 59

(1843) 2 Hare 461 at 490-91, 67 E.R. 189. Consider the earlier analyses in Bligh v Brent, (1837) 2 Y. & C. Ex.

268, 160 E.R. 397, and Attorney-General v Wilson, (1840) 1 Cr. & Ph. 1, 41 E.R. 389. Wigram relied on Wilson. 60

(1846) 9 Q.B. 806. 61

[1854] All E.R. Rep. 249. 62

There were other nineteenth century cases of uncertain relevance given the ambiguity of the language involved,

the status of the organization and other considerations. See The Society for the Illustration of Practical Knowledge v

Abbott (1840) 2 Beav. 559, 48 E.R. 1298; Great Eastern Railway Company v Turner (1872) L.R. 8 Ch. 149; Re

Forest of Dean Coal Mining Company (1878) 10 Ch. D. 450; Re Lands Allotment Company [1894] 1 Ch. 616. 63

[1897] App.Cas. 22. 64

Ibid. at 30. 65

Ibid. at 43.

13

appellant, except in the sense in which every company may loosely and inaccurately be

said to be an agent for earning profits for its members, or a trustee of its profits for the

members amongst whom they are to be divided.66

Lord Macnaghten added a summation of the effect of incorporation:

The company is at law a different person altogether from the subscribers to the

memorandum; and, though it may be that after incorporation the business is precisely the

same as it was before, and the same persons are managers, and the same hands receive the

profits, the company is not in law the agent of the subscribers or trustee for them.67

As Lord Macnaghten observed, though the circumstances of the actors might appear not to

change, the legal position did. The corporation was a distinct person that acquired ownership of

assets for its own gain, and was not merely an agent or trustee to Salomon as the alleged “real

owner” (legal or equitable) of the business. It was a short step from that holding to the

conclusion that directors owed their fiduciary duty exclusively to the corporation.

That step occurred a little more than five years later in Percival v Wright.68

Although the

Salomon reasoning could be extrapolated implicitly, technically that case had addressed only the

contractual liability consequences of separate entity status. It was left to Swinfen Eady J in

Percival to explicitly outline the legal consequences of entity status for the fiduciary

accountability of directors: “It is urged that the directors hold a fiduciary position as trustees for

the individual shareholders.…It was strenuously urged that, though incorporation affected the

relations of the shareholders to the external world, the company thereby becoming a distinct

entity, the position of the shareholders inter se was not affected, and was the same as that of

partners or shareholders in an unincorporated company. I am unable to adopt that view.”69

The

judgment is unsatisfactory in a number of respects, particularly with respect to the authorities

Swinfen Eady J did (and did not) cite and his failure to fully develop his reasoning.70

Nevertheless the decision is conceptually correct to the extent that it denies that directors have a

status-based fiduciary duty to the shareholders of their corporations.

The two cases made it clear at the turn of the nineteenth century that the introduction of the

corporate entity as the source and beneficiary of director authority meant that the status fiduciary

duty of directors was to the corporation alone. In contrast, the implications of entity status for

shareholder fiduciary accountability have never been properly understood. Courts everywhere

have failed to accurately characterize the will definition function of the general meeting. They

have generally not appreciated that shareholder will definition attracts “fiduciary” accountability,

and that the duty is owed to the corporation.

66

Ibid. at 56. 67

Ibid. at 50. 68

[1902] 2 Ch. 421. 69

Ibid. at 425-26. 70

Swinfen Eady J did not cite Foss v Harbottle, The Queen v Arnaud or Aberdeen Rail Co. v Blaikie Brothers.

Instead he cited Great Eastern Railway Company v Turner (1872) L.R. 8 Ch. 149 (a case of formal agency); Re

Forest of Dean Coal Mining Company (1878) 10 Ch. D. 450 (a partnership case) and Re Lands Allotment Company

[1894] 1 Ch. 616 (where Lindley LJ (at 631) did not differentiate between partnership directors and corporate

directors).

14

The relevant line of authority begins with East Pant Du United Lead Mining Company

(Limited) v Merryweather.71

The case involved the approval of an interested contract, where the

approval was carried by the votes of the interested director/shareholder. On granting a motion to

dismiss the claim for defective framing (as a corporate action), Page Wood V.C. stated that “no

director is entitled to vote as a director in respect of any contract in which he is interested; but

the case is different when he acts as one of the whole body of shareholders. The shareholders of

one company may have dealings with interests in other companies, and therefore it would be

manifestly unfair to prevent an individual shareholder from voting as a shareholder in the affairs

of the company.”72

That assertion, which Page Wood V.C. did not support with either authority

or analysis, is incoherent. The fact that shareholders may have conflicts certainly does not by

itself justify immunity for voting with a conflict. And given that shareholders are otherwise free

to “have dealings with interests” in other corporations, it is senseless to assert that it would be

“manifestly unfair” to prevent shareholders from voting when they are conflicted.

The claim was immediately reframed (as a shareholder action) and proceeded as Atwool v

Merryweather.73

Page Wood V.C. tried the matter. This time, with the odious facts fully before

him, he took a different view. He observed that unless a situation of wrongdoer dominance was

recognized as an exception to the Foss rule, “it would simply be impossible to set aside a fraud

committed by a director.”74

He concluded that fraud (subsequently understood as equitable

fraud) could not be sanctioned by a majority of shareholders:

It appears to me that it would not be competent for a majority of the shareholders against a

minority to say that they insist upon a matter of that kind where the whole inception of the

company is simply a motion by a fraudulent agent, quà director, to confirm a purchase as

made for £7000, which was made for £4000. The whole thing was obtained by fraud, and

the persons who may possibly form a majority of the shareholders, could not in any way

sanction a transaction of that kind.75

That obviously represented a partial recantation by the Vice Chancellor of his earlier general

statement in East Pant regarding the unfairness of preventing shareholders from exercising their

votes. Apart from that, one can see in these remarks the crude genesis of the fraud on (or

oppression of) the minority concept. It is neither stated clearly, nor developed conceptually, but

this is where it begins. Note, in that regard, that the remarks are found in a discussion of the

application of the Foss rule. It should be clear that no distinct duty on the part of the majority to

the minority was contemplated. The wrong is solely to the corporation even though shareholders

might be injured reflectively. As it was, the Vice Chancellor concluded that the votes of the

director should not be included in the poll calculation and that it was not necessary to formally

reconfigure the suit: “[H]aving it plainly before me that I have a majority of the shareholders,

independent of those implicated in the fraud, supporting the bill, it would be idle to go through

71

(1864) 2 H. & M. 254, 71 E.R. 460. 72

Ibid. at 261. 73

The 1867 decision is reported as a note in Clinch v Financial Corporation (1868) L.R. 5 Eq. 450 at 464. See also

Re London and Mercantile Discount Company (1865) L.R. 1 Eq. 277. 74

Ibid. at 468. 75

Ibid.

15

the circuitous course of saying that leave must be obtained to file a bill for the company, and pro

formâ have a totally different litigation.”76

He then formulated remedies for the corporation

(contract set aside, purchase money repaid to the corporation). The case plainly is not authority

for a duty to the minority. It is authority, on the other hand, for the conventional position that

shareholders are not free to vote as they please. Specifically, they are not entitled to use their will

definition power to approve a fraud on the corporation.

The Atwool case provided the foundation for the decision a few years later in Menier v

Hooper’s Telegraph Works.77

The suit by minority shareholders was resisted on the expected

arguments: that shareholders could vote as they pleased and that it was for the corporation to

bring the action. Mellish LJ curtly rejected the first argument: “I am of opinion that although it

may be quite true that the shareholders of a company may vote as they please, and for the

purpose of their own interest, yet that the majority of shareholders cannot sell the assets of the

company and keep the consideration, but must allow the minority to have their share of any

consideration which may come to them.”78

This rudimentary analytical template was adopted by

judges in many subsequent decisions. The right of shareholders to vote as they pleased was

asserted and then immediately qualified by a supposed duty to have regard to the minority

position. Consider, moreover, that there was no specific reference in the case to a “duty” owed

by the majority to the minority.79

The necessity to have regard to the interest of the minority was

simply declared as if it were obvious, or obviously just, as an exception to the Foss rule. The

case nevertheless did demonstrate that majority shareholders could not vote entirely as they

pleased. Properly understood, their duty was to serve the corporation – not themselves

selectively – in exercising their will definition power.

Menier is of additional significance as the source of another confusion. As noted, Mellish

LJ accepted the proposition that shareholders could vote as they pleased. He did not, however,

identify any antecedent authority or rationale for that proposition. That was because none existed

apart from the deficient analysis in East Pant. Instead there loomed entity status, and the then

well-developed general jurisprudence on the fiduciary accountability of those who assumed a

limited access. Subsequently, the need for justification was recognized by Jessel MR in Pender v

Lushington, and he proposed a “property” basis for the voting freedom of shareholders:

In all cases of this kind, where men exercise their rights of property, they exercise their

rights from some motive adequate or inadequate, and I have always considered the law to

be that those who have the rights of property are entitled to exercise them, whatever their

motives may be for such exercise – that is as regards a Court of Law as distinguished from

a court of morality or conscience, if such a court exists. I put to Mr. Harrison, as a crucial

test, whether, if a landlord had six tenants whose rent was in arrear, and three of them

voted in a way he approved of for a member of Parliament, and three did not, the Court

76

Ibid. 77

(1874) L.R. 9 Ch. App. 350. 78

Ibid. at 354. In the companion judgment, James LJ thought that it would be a “shocking thing” if a majority of

shareholders could take corporate assets to the exclusion of the minority. He believed the circumstances constituted,

like Atwool, an exception to the Foss rule. Consider the earlier judgments of the same judges in Melhado v Hamilton

(1873) 29 L.T. (n.s.) 364 (C.A.). 79

The implication is instead that the duty of the shareholders is owed to the corporation. Consider that the references

by both James LJ and Mellish LJ are to the “assets of the company.”

16

could restrain the landlord from distraining on the three who did not, because he did not at

the same time distrain on the three who did. He admitted at once that whatever the motive

might be, even if it could be proved that the landlord had distrained on them for that

reason, that I could not prevent him from distraining because they had not paid their rent. I

cannot deprive him of his property, although he may not make use of that right of property

in a way I might altogether approve. That is really the question, because if these

shareholders have a right of property, then I think all the arguments which have been

addressed to me as to the motives which induced them to exercise it are entirely beside the

question.

I am confirmed in that view by the case of Menier v. Hooper's Telegraph Works (1), where

Lord Justice Mellish observes: "I am of opinion that, although it may be quite true that the

shareholders of a company may vote as they please, and for the purpose of their own

interests, yet that the majority of shareholders cannot sell the assets of the company and

keep the consideration." In other words, he admits that a man may be actuated in giving his

vote by interests entirely adverse to the interests of the company as a whole. He may think

it more for his particular interest that a certain course may be taken which may be in the

opinion of others very adverse to the interests of the company as a whole, but he cannot be

restrained from giving his vote in what way he pleases because he is influenced by that

motive. There is, if I may say so, no obligation on a shareholder of a company to give his

vote merely with a view to what other persons may consider the interests of the company at

large. He has a right, if he thinks fit, to give his vote from motives or promptings of what

he considers his own individual interest. 80

This reasoning requires close attention. It will be observed that Jessel MR referred to property

rights generally (and not to corporate voting rights) when asserting in the first paragraph that the

motive behind an exercise of voting rights is irrelevant (using an inapposite landlord/tenant

example). That is, he formulated what he regarded as a general legal proposition and assumed

that it was relevant on a default basis. He framed the issue as a concern with the right of the

shareholder, rather than a concern with the right of the corporation. That framing drove or

anticipated his analysis. When he thereafter turned to the specific context (second paragraph), he

appears on the face of it to completely mischaracterize the decision in Menier. In that case

Mellish LJ did not in fact concede or admit that a voting shareholder may be actuated “by

interests entirely adverse to the interests of the company as a whole.” Rather, he concluded that

shareholders could not freely vote to divert corporate assets to themselves selectively.

A second observation is that Jessel MR likely was not charting a new path. Given that he

approved of Menier, his analysis should be construed in a way that is compatible with that

decision.81

That compatibility exists if he is understood to have said that shareholders are entitled

to form different views as to how to advance corporate prosperity, and in that process to have

regard ex ante to the probable consequences of the resultant decision on their reflected gain from

that corporate prosperity. Shareholders need not vote in a specific way to conform to what others

believe is the best decision for the corporation, even where that decision is ostensibly superior on

some objective economic or other basis. They must, however, refrain from exploiting the

80

(1877) 6 Ch. D. 70. at 75-76. See also Moffat v Farquhar (1877) 7 Ch. D. 591. 81

He repeated his endorsement of Menier (and Atwool) in Mason v Harris (1879) 11 Ch. D. 97.

17

corporate apparatus to produce selective personal benefit, whether individually or as part of a

subgroup of shareholders. They are entitled to register idiosyncratic views as to how to achieve

corporate prosperity – but they cannot take value from the corporate assets other than reflectively

through corporate gain. That construction would be consistent with the Atwool and Menier

decisions. It would also correspond with the then established understanding of the nature of the

general law of fiduciary accountability. Further, it would correspond with the position of

partners, who have “property” rights to vote on the merits of issues, but are simultaneously

disciplined by fiduciary accountability. It is an untenable distinction to say that partners have no

property right to vote while conflicted, but that shareholders do.

A third observation has to do with the very idea of a “property” right. The bare assertion of

such a right generally is meaningless per se. It begs the question. One cannot use the assertion of

property to establish property. A property claim is defined in part by the default rules that apply

to the claim. The property that a shareholder acquires on the purchase of a share depends on what

the subscription contract and the applicable default rules together define that property to be. If

the law imposes default fiduciary duties on shareholders qua shareholder, then their property

rights do not extend to self-dealing in corporate property. The “property” of minority

shareholders limits (or defines) the “property” of the majority.82

The property justification, in the

end, is an empty one. It is but ex post description of the boundaries set by the parties and the law.

That brings us to North West Transportation Company Limited v Beatty, the Privy Council

decision invariably taken to have established that shareholders are free to exercise their votes

even where they have a direct conflict of interest.83

The case again involved a shareholder vote to

approve a corporate transaction with a director/shareholder. The resolution was carried by the

votes of the interested shareholder. Baggallay J first described his understanding of the general

principles involved:

The general principles applicable to cases of this kind are well established. Unless some

provision to the contrary is to be found in the charter or other instrument by which the

company is incorporated, the resolution of a majority of the shareholders, duly convened,

upon any question with which the company is legally competent to deal, is binding upon

the minority, and consequently upon the company, and every shareholder has a perfect

right to vote upon any such question, although he may have a personal interest in the

subject-matter opposed to, or different from, the general or particular interests of the

company.

On the other hand, a director of a company is precluded from dealing, on behalf of the

company, with himself, and from entering into engagements in which he has a personal

interest conflicting, or which possibly may conflict, with the interests of those whom he is

82

The point was recognised in Cook v Deeks ([1916] 1 A.C. 554 at 564), where Lord Buckmaster observed that “a

resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest

and property of the minority of shareholders in favour of the majority.” Query the deficient analysis in Northern

Counties Securities Ltd v Jackson & Steeple Ltd, [1974] 2 All ER 625 at 634-35 (Ch.). Consider separately that a

voting right (shareholder property) necessarily gives a shareholder some degree of power to affect the property of

other shareholders (their contributed capital and their distribution rights). Shareholders would therefore be

accountable as fiduciaries even if they were regarded as the “real owners” of corporate property. 83

(1887) 12 A.C. 589.

18

bound by fiduciary duty to protect; and this rule is as applicable to the case of one of

several directors as to a managing or sole director. Any such dealing or engagement may,

however, be affirmed or adopted by the company, provided such affirmance or adoption is

not brought about by unfair or improper means, and is not illegal or fraudulent or

oppressive towards those shareholders who oppose it.84

Baggallay J offered no authority for the assertions in the first paragraph. The truth of the matter

was that his declaration that shareholders could vote even with conflicting interests was not

justified by the case law. Any potential support from Pender (which itself would be defective)

was directly contradicted by the Atwool and Menier cases, and the general law of fiduciary

accountability. As for the second paragraph, Baggallay J was correct to observe that the dealing

or engagement could be affirmed by the company, if the term “company” meant the legal entity.

When shareholders in general meeting exercise their will definition power to consent to a

conflicted transaction, that consent is on behalf of the entity. Accordingly, on general fiduciary

principle, and because he explicitly claimed that he was entitled to pursue his personal interest,

the consent vote should have been invalidated by the conflict of interest. It would be, in the

undeveloped and redundant words of Baggallay J, unfair, improper, illegal, fraudulent or

oppressive. That did not happen.

Baggallay J assessed whether the approval of the contract was proper. He stated that the

only unfairness or impropriety alleged was the defendant’s use of his voting power. He did not

find that an adequate objection:

It may be quite right that, in such a case, the opposing minority should be able, in a suit

like this, to challenge the transaction, and to shew that it is an improper one, and to be

freed from the objection that a suit with such an object can only be maintained by the

company itself.

But the constitution of the company enabled the defendant J. H. Beatty to acquire this

voting power; there was no limit upon the number of shares which a shareholder might

hold, and for every share so held he was entitled to a vote; the charter itself recognised the

defendant as a holder of 200 shares, one-third of the aggregate number; he had a perfect

right to acquire further shares, and to exercise his voting power in such a manner as to

secure the election of directors whose views upon policy agreed with his own, and to

support those views at any shareholders' meeting; the acquisition of the United Empire was

a pure question of policy, as to which it might be expected that there would be differences

of opinion, and upon which the voice of the majority ought to prevail; to reject the votes of

84

Ibid. at 593. Baggallay J later stated (at 600) that the question was “doubtless novel in its circumstances.”

Obviously, however, it was not novel in principle given the then understood general application of fiduciary

accountability. Baggallay J proceeded to juxtapose two ideas to address the supposed novelty: “[I]t would be very

undesirable even to appear to relax the rules relating to dealings between trustees and their beneficiaries; on the

other hand, great confusion would be introduced into the affairs of joint stock companies if the circumstances of

shareholders, voting in that character at general meetings, were to be examined, and their votes practically nullified,

if they also stood in some fiduciary relation to the company.” The suggestion seems to be that fiduciary discipline

must be relaxed to avoid the “confusion” supposedly associated with assessing the circumstances of shareholders.

But it should be apparent that no confusion is introduced by permitting proof of unauthorized conflict or benefit.

19

the defendant upon the question of the adoption of the bye-law would be to give effect to

the views of the minority, and to disregard those of the majority.85

The vacuity of this analysis is striking. First, while it was true that the constitution enabled the

particular director to acquire his voting power as a shareholder, it similarly enabled the directors

to acquire their voting power qua director, and yet they were accountable as fiduciaries with

respect to their exercise of that power. Secondly, the trailing references to shares, votes, the right

to acquire shares and the right to elect directors are of no discernible relevance. Consider the idea

that shareholders are entitled to vote for directors with shared policy views. No one questions

that. But may a shareholder accept a bribe to vote for a particular candidate? That clearly would

be an exploitation of the will definition authority for selective gain.86

Baggallay J did not appear

to appreciate that votes that involve will definition necessarily are votes made on behalf of the

corporation. Thirdly, what does it matter that an issue is “a pure question of policy”? Obviously

differences of opinion are not actionable as fiduciary breaches. The mischief, rather, is

opportunism. A decision on a pure question of policy may be compromised by self-dealing in the

same way as any other matter. Fourthly, it is simple exaggeration or confusion to say that

rejecting the votes of the defendant “would be to give effect to the views of the minority, and to

disregard those of the majority.” Fiduciary accountability only disregards the views of the

majority when the majority shareholders attempt to divert corporate assets to themselves

selectively. That is a perfectly legitimate constraint on majority power. Shareholders must

exercise their will definition authority solely to advance the corporation, and thereby incidentally

or reflectively advance all stakeholders in corporate prosperity. It is the corporation, and not the

minority, that requires the loyal exercise of the will definition function. In the end, there is not a

shred of credible justification in the judgment for status shareholder immunity from fiduciary

accountability. That perhaps is why valid claims by abused minorities have such resonance

despite their initial rejection by opportunistic majorities that seek to defeat them by relying on

North West Transportation.

The end of the century saw the Menier principle confirmed by both the Court of Appeal

and the Privy Council. In Allen v Gold Reefs of West Africa, Ld. the Court of Appeal considered

what limitations restricted the power of shareholders to alter the articles (bylaws) of the

corporation.87

Though using problematic language, and neglecting to cite any authority, Lindley

MR did confirm that shareholders do not have absolute freedom to vote as they please:

Wide, however, as the language of s. 50 is, the power conferred by it must, like all other

powers, be exercised subject to those general principles of law and equity which are

applicable to all powers conferred on majorities and enabling them to bind minorities. It

must be exercised, not only in the manner required by law, but also bona fide for the

benefit of the company as a whole, and it must not be exceeded. These conditions are

always implied, and are seldom, if ever, expressed.88

85

Ibid. at 600-601. 86

On bribes, consider generally Goodfellow v Nelson Line (Liverpool), Limited [1912] 2 Ch. 324; British America

Nickel Corporation Limited v M. J. O’Brien, Limited [1927] A.C. 369 (P.C.). See also E Hannibal & Co Ltd v Frost

(1988) 4 B.C.C. 3 (C.A.). 87

[1900] 1 Ch. 656 (C.A.). 88

Ibid at 671.

20

The language is problematic in that it may be read, as it subsequently was, as recognizing a

majority duty to the minority (rather than a shareholder duty to the corporation).89

It should be

understood that powers are never “conferred on majorities” as such. Rather, powers are

conferred on defined groups or bodies, which groups then divide or fractionate (as expected) into

majorities and minorities in the course of the exercise of the power. On principle there is no duty

between sections of a group that come into being or become identifiable only spontaneously at

the time of a vote (potentially a different sectioning on each required vote, for example, multiple

votes pertaining to one transaction or project). That said, Lindley MR did state that the

amendment power was to be exercised “bona fide for the benefit of the company as a whole.”

The only difficulty with those words is the adjectival addition of the “as a whole” phrase. What

is the purport of the added words? Does the phrase indicate entity status, or some notion of the

corporation as an aggregate of shareholder or stakeholder interests? As will appear later, the

pregnant ambiguity of the phrase only deepened confusion.

The Privy Council analysis in Burland v Earle was structurally untidy, but also confirmed

that there were limits on the exercise of shareholder voting power.90

Lord Davey explained that

minority shareholders have a procedural right to enforce the right of the corporation to relief

against shareholders who attempt to divert corporate property selectively:

It is an elementary principle of the law relating to joint stock companies [corporations] that

the court will not interfere with the internal management of companies acting within their

powers, and in fact has no jurisdiction to do so. Again, it is clear law that in order to

redress a wrong done to the company, or to recover moneys or damages alleged to be due

to the company, the action should primâ facie be brought by the company itself. These

cardinal principles are laid down in the well-known cases of Foss v Harbottle (1843, 2

Hare 461) and Mozley v Alston (1847, 1 Ph 790), and in numerous later cases which it is

unnecessary to cite. But an exception is made to the second rule, where the persons against

whom the relief is sought themselves hold and control the majority of the shares in the

company, and will not permit an action to be brought in the name of the company. In that

case the courts allow the shareholders complaining to bring an action in their own names.

This, however, is mere matter of procedure in order to give a remedy for a wrong which

would otherwise escape redress, and it is obvious that in such an action the plaintiffs

cannot have a larger right to relief than the company itself would have if it were plaintiff,

and cannot complain of acts which are valid if done with the approval of the majority of

the shareholders or are capable of being confirmed by the majority. The cases in which the

minority can maintain such an action are, therefore, confined to those in which the acts

complained of are of a fraudulent character or beyond the powers of the company. A

familiar example is where the majority are endeavouring directly or indirectly to

appropriate to themselves money, property, or advantages which belong to the company, or

89

The language is problematic in other respects. What does it mean to say that a power must be exercised in “the

manner required by law”? And how is it different to say that a power “must not be exceeded”? Generally, with

respect to the breadth of the language, Lindley MR appears to contemplate both loyalty and authority limits on

shareholder will definition. 90

[1902] A.C. 83.

21

in which the other shareholders are entitled to participate, as was alleged in the case of

Menier….

There is yet a third principle which is important for the decision of this case. Unless

otherwise provided by the regulations of the company, a shareholder is not debarred from

voting or using his voting power to carry a resolution by the circumstance of his having a

particular interest in the subject-matter of the vote. This is shown by the case before this

board of the North-West Transportation Company Limited v Beatty...91

It may first be observed that Lord Davey’s formulation of the law is conceptually disordered. He

described two “cardinal” rules: (1) no judicial interference with authorized internal management

(i.e. majority rule) and (2) that the corporation alone is to take action to remedy corporate injury.

He next described the exception that qualified both cardinal rules (both rules, rather than only the

second rule, because the court will interfere when the exception applies). Shareholders may not

use their voting powers to extract gain selectively from corporate assets. Thereafter, however, he

stumbled conceptually when he added the separate third principle that shareholders may exercise

their voting rights even when conflicted. It should be evident at this point that the third principle

is just a restatement or manifestation of the first principle – and that it is equally (and originally)

qualified by the associated exception. His disjunctive assertion of the third principle might

wrongly be taken to imply that it is not qualified by fiduciary accountability.

Apart from that, it is clear that the court did recognize that there was an established

constraint on shareholder will definition. Shareholders were bound by a default proscriptive duty

to not exploit their voting power for personal advantage, and that duty was owed only to the

corporation. It was merely to facilitate the efficacy of that duty that individual shareholders were

allowed to assert procedurally the correlative corporate right where the majority prevented the

corporation from taking action.92

The above decisions are the foundational cases for the modern regulation of will definition

opportunism. Yet there is no fiduciary terminology in them. The reason for that appears to be the

early assertion and formal acceptance of the notion (in East Pant, Menier, Pender and North

West Transportation) that shareholders are entitled to vote as they please. That notion facially

implies that shareholders do not in any respect undertake to act in the interest of the corporation,

thereby negating the parallel application of fiduciary accountability, and repressing any general

recourse or appeal to fiduciary principles. The notion, however, was a novel and unjustified

fabrication to the extent it purported to excuse voting compromised by unauthorized conflicts or

benefits. Although judges in subsequent cases did not understand that, they nevertheless refused

to tolerate selective diversion, and proceeded to limit the free exercise argument simply with

counter assertions of an unclassified substantive duty on the majority and a procedural minority

right to enforce that duty. There was accountability, but not “fiduciary” accountability. And the

accountability was to the minority, rather than to the corporation. In the end, although the judges

substantively limited the will definition power of shareholders, they got the logic wrong.

Shareholders are accountable as fiduciaries to the corporation when exercising their will

91

Ibid. at 93. On the procedural nature of a derivative action, and for an affirmation of corporate right, see Smith v

Croft (No. 2) [1988] Ch. 114 at 170. 92

The incapacity of shareholders to take action on a corporate wrong may be understood as a burden (as opposed to

a benefit) of entity status.

22

definition function. They must avoid unauthorized conflicts and benefits. That understanding of

the regulation does all of the work of the “fraud on the minority” exception, and does it

coherently based on the separate entity status of the corporation. Unfortunately that is not how

the regulation is expressed today. Apart from occasional nascent insight, and apart from statutory

intervention, the jurisprudence in this area remains essentially unchanged from its state at the end

of the nineteenth century.93

Twentieth Century Developments

There nevertheless are decisions in the twentieth century that require attention. It has been

explained that shareholder will definition should attract fiduciary accountability, and that in fact

such accountability had been forged by the end of the nineteenth century. Subsequently many

courts turned to the decision in Allen v Gold Reefs for its statement that a power conferred on a

body (or a majority) “must be exercised, not only in the manner required by law, but also bona

fide for the benefit of the company as a whole, and it must not be exceeded.”94

Judges in a

number of cases dealing with the shareholder power to amend the articles found it necessary to

clarify those words in certain respects.

[Several pages omitted pending revision]

Conclusion

The nineteenth century formulation of shareholder fiduciary accountability was hobbled by

a failure to leave behind the joint stock company view that shareholders were co-principals. That

was apparent in the continuing references to corporate shareholders as the “owners” or

“proprietors” of the business, and to the diverse statements indicating that corporations were

merely aggregations of shareholders. It was further hobbled by the early unwarranted acceptance

of the deviant assertion that shareholders were free to vote when compromised by personal

interest. Those factors hindered a full recognition and implementation of the legal consequences

of corporate personality. Strong affirmation of entity status was delayed until Salomon, and then

Percival, where the fiduciary accountability of directors was addressed. Unfortunately that was

the end of the development of the “fiduciary” consequences of entity status. Conceptual stasis

ensued. The courts never did explicitly recognize that the Atwool/Menier principle is in

substance status fiduciary accountability and that the duty of shareholders is to the corporation.

93

An example of nascent insight is found in Clemens v Clemens Bros. Ltd. [1976] 2 All E.R. 268 at 282 (Ch.) (“I

think that one thing which emerges from the cases to which I have referred is that in such a case as the present Miss

Clemens is not entitled to exercise her majority vote in whatever way she pleases. The difficulty is in finding a

principle, and obviously expressions such as 'bona fide for the benefit of the company as a whole', 'fraud on a

minority' and 'oppressive' do not assist in formulating a principle.”). See also D. Prentice, “Restraints on the

Exercise of Majority Shareholder Power” (1976) 92 LQR 502. Generally see Cook v Deeks ([1916] 1 A.C. 554;

Rights & Issues Investment Trust Ltd. v Stylo Shoes Ltd. [1965] Ch. 250; Daniels v Daniels [1978] Ch. 406;

Estmanco (Kilner House) Ltd. v Greater London Council [1982] 1 All ER 437; Smith v Croft (No. 2) [1988] Ch.

114; Re Wishart, 2009 S.C.L.R. 500. The same general principles are applied to creditor arrangements. See Re

Wedgwood Coal and Iron Company (1877) 6 Ch. 627; Goodfellow v Nelson Line (Liverpool), Limited [1912] 2 Ch.

324; British America Nickel Corporation Limited v M. J. O’Brien, Limited [1927] A.C. 369 (P.C.); White v Bristol

Aeroplane Co. Ld. [1953] Ch. 65 (C.A.); Redwood Master Fund Ltd. v TD Bank Europe Ltd. [2002] EWHC 2703

(Ch.). 94

Supra note [ ] at 671.

23

There is no reason to maintain the modern incoherence. While the conceptual ideation may

be explosive, the substance of the law will remain largely unchanged. Because the perceived

mischief is the same, the shareholder duty to the corporation will produce essentially the same

results as a majority duty to the minority. To the extent the results differ, the conceptual

foundation will be stronger. The logic, the universal logic, is that shareholder limited access must

not be compromised by unauthorized conflict or benefit. Though some may have reason to deny

it, everyone understands the necessity of controlling opportunism in limited access arrangements.

That salutary social policy does not conflict with any other general communal norm or value. It

does not conflict with fair trade or even with the exercise of economic power. Nor does it hold

actors to an unreasonable or burdensome standard. Shareholders need not fear fiduciary

accountability. It protects them from each other. Their fiduciary duty to their corporations deters

the selective diversion of corporate value by self-dealing majorities and thereby promotes

corporate prosperity.