Directors' duties: Duty to promote the success of the company

Out-Law Guide | 16 Jun 2010 | 5:03 pm | 2 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated. Two examples that pre-date the Companies Act 2006 serve to illustrate the kind of thinking the government expects fro...

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

Two examples that pre-date the Companies Act 2006 serve to illustrate the kind of thinking the government expects from directors. In the first, the board came to the right conclusion first time; in the second, external events led to a re-assessment and a change of heart.

Manchester United

In 2005, Malcolm Glazer was close to succeeding in his bid for Manchester United. But although his offer of 300p a share was generally thought to be fair, the board held off from advising shareholders to accept. Having looked at the Glazer business plan and his method of financing the bid with many millions of debt, they concluded that a takeover on those terms would place a ‘significant financial strain on the business’, and, in their view, that was not in the company’s best interests.

Shareholders are free to act in their own financial interests and most takeovers are decided in favour of the highest bid. But here, in deciding whether to recommend the bid or not, the board looked beyond the current shareholders and focused instead on the interests of the company as a separate entity made up of future as well as current shareholders, and of creditors and employees as
well. A company over-burdened with debt was not in their interests. In a foreshadowing of the Act, the board preferred the longterm consequences for the company over the short-term benefit for shareholders.

The last word, though, went to the shareholders. They chose to take the money, as was their prerogative, and so Glazer won the battle.

Shell 

The story of the Brent Spar incident shows what can happen when directors fail to think about the wider implications of business decisions.

In 1995 Shell decommissioned its Brent Spar oil storage installation in the North Sea. It had no more use for it and, having taken expert advice, decided that the best solution was to tow it out to the mid-Atlantic and sink it.

Public outrage ensued. Greenpeace occupied the Spar, 50 Shell service stations in Germany were damaged by protesters, two were fire-bombed, and the German chancellor made a formal protest to the British prime minister.

As it saw its carefully nurtured reputation begin to shatter, Shell was forced to re-think. It halted the disposal, revised the plan and came up with an alternative – the offending hulk was recycled as the base for a roll-on/roll-off ferry quay at Mekjarvik in Norway.

Although the original disposal plan seemed to be the best option for Shell, looked at in narrow commercial terms, that was not enough. The company came to realise that a rigorous assessment of the environmental, social and health impact of any major project was equally necessary for its long-term success.