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management of the companies. Creditors could not restrain companies or directors
from any actions even if they fear these would lead to the company‟s failure. Even
when the company is in liquidation, generally the right to take action against the
company or directors is not conferred on creditors but on the liquidator.
6.2.1 Limitations of the Theory
The shareholder supremacy theory concentrates on the objective of increasing the
shareholders‟ value. However, it does not provide a clear explanation as to what
constitutes shareholders‟ value. 45 It is unclear whether directors should focus on
generating short term profits for shareholders or on the company‟s long term
profitability. The absence of exact definition causes difficulty to creditors in
assessing whether they have fulfilled the said objectives, especially when
shareholders themselves may not have homogenous interests in the company.
The theory has also been regarded as restricted in two ways. First it does not
acknowledge investors‟ ability to diversify. 46 In other words, the theory does not take
into account the possibility of shareholders having multiple roles; it only considers
their interests as shareholders alone. 47 Second, the theory may discourage those other
than shareholders to invest in the company since they know that their interests will
be subordinate to shareholders'. 48
Under the theory, shareholders are motivated to monitor the directors in order to
protect their investment, but shareholders seldom exercise effective control over
45 Keay, “Corporate Objective” above n40 at 670.
46 Ibid.
47 Ibid.
48 Ibid.
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