CHAPTER 4

Board Authority and Shareholders' Rights of

Intervention

chapter "ill discuss the decision-making primacy of a company's board of

directorsas one of the most fundamentallegal principlesof UK (and, indeed,
Ancio-American)corporate governance. The first part of the chapter sets out
the main corporate-constitutionaland common law rules that establish this
basicprinciple, followed by an overviewof the principaltheoretical rationales
centralized board governance. The second part discussesthe status and
roleof shareholders,focusingon rights of intervention in corporate decision-
making in particular participation in corporate voting —that shareholders
are granted by virtue of company law (as opposed to shareholder engagement
through additional or other means, which will be discussed in Chapter 5). This
part •ill also discuss the practical significanceof shareholders' intervention
nghts and, finally,concludewith an assessmentof the merits of 'shareholder
empowerment' as a counterbalanceto board primacy.

THE PRISLACYOF THE CORPORATEBOARD

1441 Foundations
txjard's primacy is reflected in both the UK's Model Articles as well as the
DelawareGeneral Corporation Law, which both make clear that the ultimate
vowcrto 'manage' or direct the companyis by default vested in the board of
directors.)-ms fact, as well as the 'director primacy' theory explored further
triow, should not confuse readers who might fairlypoint to the 'shareholder
pnmacy' norm mentioned elsewherein this book.2 Although the terminology

j Model Arucies for Public Companies and Model Articles for Private Companies Limited By
Shares,arncie 3: 'Subject to the articles, the directors are responsible for the management of
tir unnpany's business, for which purpose they njay exercise all the powers of the cotnpany.',
Iklawarc Annotated, title 8, section 14 1(a): "l'he business and affairsof every corpo-
rat""' organjzcd under this chapter shall be Jiianagedby or under the direction of a board of
directors, except as may be otherwise provided in this chapter or in its certificate of incorpora-
tun". Jn contrast, CA 2006 docs not contain a conqjaral)leprovision.
'Sce Chapters 2 and 5,

71
72 ۥRPORATV GOWRNANCE

as used in this book refers to the board's

vancs, •sharcholdcr primacy' obligation to focus on their interests b
primary
accountabilityto shareholders and
of decision-making
thc allocation powers.3 Also
docs not normally relate to
Chapter 7, 'board primacy' does not mean th
"ill explain in more detail in
decision-making function themselves: directors at
boards mll cxcrciscevery
officers and employees, who in turn may
cally dclcgatc many tasks to corporate
hierarchy. Moreover, a company's
dclcgatc them further down the corporate
(US) may assign certain powersto
articles (UK) or certificate of incorporation
However, neither delegation
the shareholdersand/or limit the board's power.
board's supreme powers
nor, exceptionally,alterations to the default rule of the
•Thin the corporationchange the fundamental principle of board primacy
(or board authority) that —despite the trend towards strengthening share_
holder powers in the present chapter and elsewhere in this book —remainsa
hallmarkof the Anglo-American corporate structure.

Are Directors tbe 'Agents' of Shareholders?

In analyzing the legal and economic dynamics of the relationship between
directorsand shareholderswithin a company,it may be convenientto think
of directors as being the 'agents' of shareholders. Indeed, in Chapter 2, we
al«) discussed the contractarian model that conceptualizes the relationship and
diverging interests between shareholders and directors/ managers in terms of
a principal-agent model. Yet, perhaps confusingly, despite such terminology
there is no 'agency' in the traditional legal sense of this term. Particularly in the
context of a public company, the idea of shareholders as principals (or 'owners'
of the company)4 and directors as their agents, where directors would act
Ecording to shareholders' instructions and as their representatives, is legally
and factuallyincorrect.
Although shareholders can assume certain powers, or even direct the board
to act in a certain manner, 5 directors are not their agents. In two early cases,the
CK Court of Appeal has made it clear that shareholders and directors are not
in an agency relationship. In Automatic Self-Cleansing Filter Syndicate Co.J'
Cunngnghgme,6 a shareholderbrought an action demanding that the board
év»uld implement a shareholders' resolution, adopted with a simple major-
gy d vrnes, that required the company to sell its assets to another companY•
However,the company's articles provided that the directors were entrusted
manapng the company and the only procedure for shareholdersto

&.e, example,J.E. Fiuh, 'Measuring Efficiencyin

MaareivÅdcrPnmacy' (2005) 3 J Journal of
Corporate Law: The Role of
Corporation Law 637, 638 n. 4, explaining that
•uweivAdcr pnmacy' can refer to (J ) the principle of
shareholder wealth maximization;
(2) "inmate control of shareholdersover corporate
bards and managersowe fiduciary duties decision making; or (3) the idea that
• As (exclusively or mainly) to shareholders.
duu&Ed more detail below, shareholders
'On do not Sown' the company.
•hareholdcrs'soxalled 'reserve power', see
text further below.
2 34 (CA).
 BOARDAUTIIORIIT AND SHARIMOLDEICS' OF INTERVENTION 73

influcnccthe board's decision making was through a special resolution (passed

"Ith a 75 pcr cent nujority oc votes). The Court of Appeal thus refused the
claimas an invalid attctnpt to instruct the board by sidcstcppmg the compa
nv•sconstitutionalseparation of powers. In this context, the court stated that
directorsarc not the agents of the shareholders,and that the only way for
sharcholdcrsto 'direct' the board was through the procedure as outlined in
thc company's articles.
Shortly thereafter, in Gramophone and Typewriter Co v Stanley,7 the Court of
Appealagain referred to its decision in Automatic Self-Cleansingand affirmed
the prcoously stated position on the legal nature of the shareholder-director
relationship. As Buckley LJ stated:

The directors are not servants to obey directions given by the shareholders as
indiGduals;they are not agents appointed by and bound to serve the sharehold
ers as their principals. They are persons who may by the [articles] be entrusted
mth the control of the business, and if so entrusted they can be dispossessed from
that control only by the statutory majority which can alter the articles. Directors
are not, I think, bound to comply with the directions even of all the corporators
acting as individuals. Of course the corporators have it in their power by proper
resolutions, which would generally be special resolutions, to remove directors
who do not act as they desire, but this in no way answers the question . whether
the corporators are engaged in carryrng on the business of the corporation. In my
opinion they are not. To say that they are involves a complete confusion of ideas.8

As these two cases and their strong reliance on the articles demonstrates, the
dÅisionand allocation of corporate powers in UK companiesis governed by
contractarian principles. The Companies Act 2006 reflects this basic principle in
section 33(1 which provides that the 'provisions of a company's constitution
bind the company and its members to the same extent as if there were covenants
on the part of the company and of each member to observe those provisions'.
Of course, while shareholders can alter the corporate constitution9 at any time,
they can only do so in accordance with prescribed constitutional procedure,
which requires a special resolution with a heightened majority requirement of
three-quarters.10
Again, the Automatic Self-Cleansingdecision provides a good illustration of
ll
this point. There, alluding to the partnership roots of English company law,
the court compared the position of directors to those of 'managing partners
appointed to fill that post by a mutual arrangement between all the sharehold
crs'. J2It also stated that, as in the case of a partnership, the internal arrangements

'119081 2 KB 89 (CA).
• Illis sentiment was also expressed in John Shaw C Sons P Shaw & Shaw [ 19351 2 KB 113.
9As defined in section 17 of the Cornpanics Act 2()()6.
' 0 ibid., sections 2 J and 283( J
See L.C.B Gower, 'Some Contrasts between British and American Law' ( 1956) 09 Harvard
Review 1 369, J 370—72.
n( 2 Ch 34 (CA), per Cozens• Hardy LJ.
74 c•RPORATV GOVERNANCE

company are 'mutual stipulations

bcNx•cn the parties making up a for th
case at hand, there was 'no
common bcncfit' and that, in the ground for saying
to the express stipulations Contained
that the mcrc majoritycan put an end
words, shareholders should
thc bargain which they have made' .13In other liein
thc bed that they have made for themselves: they are bound by the corporate
constitution, which is akin to an agreement or 'contract' and which they cannot
simply 0NQrrideby giving instructions to directors as their 'agents'. As one com.
mcntator has observed, English company law is thus based on a 'simple but
very flexible-- empowering, facultativeprinciple, through which shareholders
can establishin a company's articles ... how they will interact with each other,
and other participants in the company.This principle ... [gives] enduring
becaleffect to shareholders' bargains as to how their company is to be run '14
Under English law, therefore, the board's supreme executive authority
stems from the contractarianprinciple of consensus or agreement between
shareholdersvia the corporate constitution. Under US law, in contrast,the
authority is traditionallyregarded to emanate directly from the state
as the formal grantor of corporate status (the 'concession' theory of corporate
law).1SUnder this latter view, the directors are also not regarded as agentsof
åe shareholdersgiven that they receivetheir powers directly from the state.
The Court of Appealsof New York, for example, has expressed this ideain
Hoyt v Tiompson's Executor. 16

The board of directors of a corporation do not stand in the same relation to the
corporate body which a private agent holds toward his principal. In the strict rela-
ton of principal and agent, all the authority of the latter is derived by legislation
from the former ... But in corporate bodies the powers of the board of directors
are, in a very important sense, original and undelegated ... in the sense of being
rcccivcd from the State in the act of incorporation.

in continuance of the traditional roots of their respective company lawsboth

the UK and US states such as Delaware do not conceptualize shareholdersand
dxrecurs as principalsand agents in a technical legal sense. Indeed, in Delaware
in crntrast to UK corporate law the law does not to
even permit shareholders
gutiate amendments to the company's charter of incorporation in order to remove
executiveauthority from the board. In this and
other respects,17UK shareholders
may exercisegreater influence over directors
than their US counterparts•
JbJd
R. Nolan, Continuing Evolution of Shareholder Governance' (2006) 65 Cambridge
Journal 95.
J' On the concession theory, sec M. the
Petrin, SFrom Nature to Function: Reconceptualizing
•n•cory of tir Firm' (2013) 118 Penn
State Law Review I, 5—6.
19 N.Y. 207 (N.Y. 1859), per Comstock
J. See also People ex rel. Manice v Powell,201
194 (N.Y. 1911), where Chase J found that
not mere employees, but a part of an 'the individual directors making up the board
elected body of officers constituting the executiveagents
of the corporation'.
i'Sce the discussion further below in
this chapter.
 BOARDAUTHORITY AND SHAREHOLDERS' RIGHTS OF INTERVENTION 75

'I}corcticalRationalcsfor Board Primacy

a managerial or techno
In the 1970s, John Kenneth Galbraith developed
cratic justification for ccntralizcd corporate decision making.18 Essentially,
Galbraithargued that organizational, group decision-makingmust necessar-
ilybe authoritarianin order to protect the organization (or 'technostructure')
from poorly informed outsiders. While Galbraith argued that power therefore
had to pass from the shareholders to the corporate organization itself, he also
observed—in keeping with the weak position of boards during the time of his
—that it was management, not the board of directors, that held defacto
decision-making power.
Subsequently, corporate theorists have developed various explanations for
authoritativecorporate decision-making,now, however,with a focus on the
board's primacy.19As it turned out, the dominant contractarian paradigm
(discussedin Chapter 2) was particularly well suited to explain the directors'
elevatedposition, namely by reference to hypothetical negotiations between
the board and shareholders,with board primacyrepresenting the most effi
cient outcome of such negotiations. Under this view, the law —in order to
avoid the need for actual negotiations, which would be time consuming and
costly—simply provides for this decision-making arrangement as the (pre-
sumed) best —because most efficient —option for all parties involved. For
example, Stephen Bainbridge refers to this contractarian or consent-based jus-
tificationfor board autonomy when he notes that 'the rights of shareholders
are establishedthrough bargaining, even though the form of the bargain typi-
by the
callyis a take-it-or-leave-it standard form contract provided off-the-rack
This
default rules of corporate law and the corporation's organic documents' .20
consent-basedapproach provides the basis for Bainbridge's director primacy
and
theory, which presently represents one of the most prominent descriptive
normativeaccounts of the board's authority.
Under director primacy theory, the focus is not on a company's purported
nature as being a nexus of contracts.21Instead, the guiding idea is that the
equipped
firm has a central nexus of contracts, which is a board of directors
with ultimate power of fiat or authority. The board, in turn, negotiates with
part on the
and hires the various factors of production or 'capital'. Drawing in
economist Kenneth Arrow's work on organizational decision-making, direc-
ultimate
tor primacycontends that effective corporate governance requires
authority over the firm's conduct to be vested in a central place —a model that
is mirrored by the typical decision-makingstructure of public corporations
today.Thus, the board of directors, and not shareholders, is and should be

Mifflin 1973) and Ibe New

See J.K. Galbraith, Economicsand the Public Purpose(Houghton
Industrial State (Princeton University Press 1976), 186.
j9There is also an opposing movement that argues for increasing shareholders powers. For
empowerment below.
aspects of this discussion, see the section on the merits of shareholder
and Practice (OUP 2008), 33.
S.M. Bainbridge, The New Corporate Governance in Theory
On this, see Chapter 2.
 eoRrouT1i GOVERNANCE

in control of the corporation, exercising almost unfettered authority. Am

the model's most important claims is therefore that in order to ensureOng
cor_
pot-ate decisionnaking efficiency, the board's decision making authority
should, subject to narrow exceptions, not be trumped by either sharehold
ers or courts.22To be sure, Bainbridge also queries why shareholders
should
and murld voluntarily consent to vest decision-making authority in the
board
rather than retain it for themselves.In short, his answer is that thereis
a
necessity of centralized authority given that shareholders in widely dispersed
companies will have difficulty in reaching effective consensus, possess limited
information, and may encounter conflicting interests among themselves.In
this situation, centralized and specializeddecision-makingby the boardis
arguably preferable. We will return again to these apparent limitations faced
by shareholders later in the chapter when we discuss the merits of shareholder
empowerment.
Another notable modern theory —which is also based on contractarian
ideas —is Margaret Blair and Lynn Stout's team production model, which
discussed in Chapter 2. As explained there, the corporation is described
as a team-production unit that serves as a vehicle through which teamsof
shareholders, creditors, managers, employees and other stakeholders relin-
quish control over firm-specific resources to a board of directors. 23The public
firm is a 'mediating hierarchy' whose essential function, exercised through
the board of directors, is to coordinate team members' activities, allocatepro
duction outputs, and mediate disputes among team members. 24'At the peak
of this hierarchy', Blair and Stout explain, 'sits a board of directorswhose
authority over the use of corporate assets is virtually absolute and whose inde-
pendence from individual team members . is protected by law.'25Becauseof
the board's independent position, which sees it floating above the other team
members and exercising a role similar to that of a trustee for the firm's assets,
the team production approach tends to support policies that shield direc-
tors from being under the direct control of either shareholders or stakehold
ers. 'Jhus, the team production concept also provides theoretical support for
t:xjardauthority or board primacy, albeit for reasons that differ from director
pnmacy theory. 26

J)irector primacy theory also asserts that shareholders alone, as opposed to other stake-
holders, arc the appropriate beneficiaries ofdirector fiduciary duties. Consequently, director
pnmacy entrusts the board with maximizing the wealth of shareholders, whose interests should
prevail over those of any other constituencies.
'J M.M. Blair and L.A. Stout, 'A Team Production Theory of Corporate Law' (1999) 85
Vanderbilt Review247.
J"Jn contrast to the traditional contractarian approach, team production implies that the board
should take into account interests other than only those of shareholders, since its responsibiliW
is to protect the resources for all team members.
U BIa1rand Stout, above n. 23, 753.
u On thcsc reasons, see Chapter 2.