Corporate benefit
Encyclopedia
The interest of the company (sometimes "company benefit" or "commercial benefit") is a concept that the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...

 in corporations are in most legal systems required to use their powers for the commercial benefit of the company and its members. At common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

, transactions which were not ostensibly beneficial to the company were set aside as being void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....

 as against the company.

Background

An early illustration of this principle is to be found in Hutton v West Cork Railway Co (1883) 23 Ch D 654, where the English Court of Appeal
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...

 held that the paying of a gratuity to employees prior to their dismissal was an improper exercise of the powers of the company, because the company was no longer a going concern, and thus stood to obtain no benefit (and no furtherance of its objects) through the payment of the gratuity; as Bowen LJ memorably remarked: "there are to be no cakes and ale except such as are required for the benefit of the company." (The decision itself is reversed by statute).

Any transaction which the directors enter into which is outside the powers of the company (and thus outside the scope of their authority) may nonetheless be ratified by the shareholders of the company, and will thereby be binding upon the company, see for example under English law
English law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...

, Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258.

Modern developments

The rule is generally seen to be particularly harsh towards both third parties and against directors, who are regarded as being in breach of their duty only by acting with what others might regard as common human decency. Where the company's property could not be recovered from the third party, the directors would be personally liable to recompense the company.

There were also concerns that running companies ruthless for the financial benefit of the shareholders had a countervailing cost, making directors unwilling to participate in programmes that were beneficial to the community generally, or to the environment. It also meant that companies became much less willing to make donations to political parties, which may have had more impetus in bringing about legislative change than concern for communities or the environment.

Some legal systems have now abrogated by statute the rule that as against third parties the transaction may be void if it has insufficient commercial benefit to the company.

In some countries, statutes now expressly provide for the directors to consider interests other than the pure financial interests of the shareholders.

However, in some jurisdictions there are proposals to make the power to act otherwise than for the financial benefit of the company even wider. For example, in the United Kingdom, the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...

, when brought into force, will require that directors have to consider the impact of their actions on a much wider range of stakeholders. That Act would require a director "to promote the success of the company for the benefit of its members as a whole", but sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are:
  • the likely consequences of any decision in the long term
  • the interests of the company's employees
  • the need to foster the company's business relationships with suppliers, customers and others
  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of business conduct, and
  • the need to act fairly as between members of a company


The proposed new duties have been subject to some criticism, both from those who argue that the new duties do not have sufficient bite, and also from those who fear that it diverts directors' focus from what it is that they are meant to be doing (viz., generating profits),http://www.altassets.net/features/arc/2006/nz8451.php and there are fears of widespread litigation, and increase in director's insurance premiums. However, because the new duties are expressed in non-imperative terms, and there is no sanction, the likelihood is that although they will empower the board of directors to take decisions that do not appear to directly financially benefit the company, they are unlikely to ever be required to do so.

Distinction from other legal concepts

Conceptually, it is important to distinguish failure of a transaction for want of corporate benefit from other related legal concepts. These include:
  • Failure of consideration: Under contract law in most common law legal systems, to be enforceable a contract requires both parties to provide consideration
    Consideration under English law
    Consideration in English law is one of the three main building blocks of a contract. Consideration can be anything of value , which each party to a legally binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a...

     (i.e. something of value). However, the consideration does not need to be equal, and the gratuity given in Hutton v West Cork Railway Co would still have failed for want of corporate benefit if, for example, the company had allowed employees to purchase company property at a discount.
  • Transactions at an undervalue: Although most examples of failure for want of corporate benefit involve transactions which were either a gift, or were made at a substantial undervalue, the concept is different in purpose and effect from provisions of insolvency law which prohibit undervalue transaction
    Undervalue transaction
    An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors....

    s at a time when the company is insolvent.
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