‘Shareholder Supremacy in a Nexus of Contracts: A Nexus of Problems’

Abstract

This article focuses on shareholder supremacy and exclusivity derived from a view of the company as a nexus of contracts. The nexus of contracts theory is the dominant theory within English company law. It defines the company as a contract between private individuals. The shareholders and the company are recognized as the only parties to that contract. While corporate membership is reserved exclusively for shareholders, the rest of the stakeholders are viewed as external to the company. The article will question the theoretical and doctrinal validity of shareholder supremacy and exclusivity within this context. It argues that while the nexus of contracts theory promotes shareholder exclusivity in a rather dogmatic manner, not only the law but also the courts have limited the rights of shareholders to a significant extent. The article does not place into doubt the importance of shareholders within the corporate context; after all the shareholders are the capital providers of the company. It does however criticize the current status quo in English company law where theoretically the shareholders are sitting on the corporate throne in a company which includes no one else but them, but in practice their supremacy is challenged by the courts to such a degree that it is difficult to exercise even the rights stemming from their shares and to have access to effective remedies against managerial abuse. The article will therefore underline the controversies inherent in the nexus of contracts theory. It will shed light on the distorted application of the theory within English company law. It argues that the theory should be reformed to adjust to the new reality. On the one hand, it should certainly protect the rights of shareholders stemming from their shares and it should allow for effective shareholder protection against mismanagement. On the other hand, the theory should adopt a more inclusive definition of the company that will not leave the stakeholders off its context. Especially those stakeholders who clearly have a contractual relationship with the company should be factored into corporate governance. Therefore, the article will argue against the doctrinal dominance of shareholder exclusivity and supremacy by arguing that they nowadays flow from a flawed interpretation of the nexus of contracts theory. The article will focus on shareholder protection; it will examine section 994 of the Companies Act 2006, which provides for one of the main remedies against directorial abuse. The jurisprudence of the courts embodies a clear mismatch between theory and practice. Absolute shareholder supremacy should have entailed an enhanced level of protection to match the status of shareholders as the only members of the company. After all, the nexus of contracts theory defines the interests of the company as the interests of the shareholders. Yet, the judicial stance on this matter proves that the courts have actually curtailed the protection granted to shareholders by the Companies Act 2006; this clearly testifies to the deeply problematic nature of shareholder supremacy within the context of the nexus of contracts theory. The article will therefore argue that the dominant views in theory, academia and law, which continue to recognize a notion of absolute shareholder supremacy and exclusivity, flow mostly from ideology rather than reality. Ideological dogmatism has resulted in a very narrow, and in many ways distorted, definition of the company; one which left only the shareholders within its context albeit and paradoxically with a limited set of rights to control the management. The article argues that the current law should be reformed, aiming at creating a more inclusive company where shareholders would actually enjoy a bundle of rights appropriate for capital providers. The law should also be reformed so that stakeholders whose interests are integrally linked with the company’s fortune – such as employees and creditors – should be factored into the company. This is in the interests of both the company and the stakeholders