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maximisation of wealth of shareholders. 14 The problem classified as „shirking‟ also
extends to incompetence, since if shareholders are for practical purpose unable to replace
the management, the company may suffer from inept leadership. 15 The public nature of
the company therefore warrants and justifies the role of the State to regulate the affairs of
the company. 16
In the 1980s, there was the emergence of a new economic theory, the contractual or
nexus of contracts theory. 17 The theory sees the company as the web or nexus of contracts
between the various human participants in the enterprise, including shareholders,
managers, employees, creditors and consumers. 18 The essence of the theory is that the
company is regarded as a private arrangement in which each of the individual participants
seeks to maximise their own wealth by entering mutually beneficial contracts. 19 The
behaviour of those involved, therefore, is regulated by market forces that regulate
company‟s relationship with outsiders. 20 The central premise of the theory is that the
company is managed for the benefit of shareholders, though it rejects the historical view
that shareholders own the company. 21
This theory that the company is managed for the benefit of shareholders, however, is seen
as no longer representing the current notion of business whereby many other players are
involved in the success of the company. 22 In fact, the complexity of the modern structure
14 Ibid.
15 Ibid.
16 Rickett above n7 at 60; Cheffins above n7 at ch 3.
17 Rickett above n7 at 55;Cheffins above n7 at 31-36; ; Frank H Easterbrook and Daniel R. Fischel “The
Corporate Contract” (1989) 89 Columbia L.R 1416 at 1426-1434.
18 David Millon “ New directions in corporate law: Communitarians, contractarians and the crisis in
corporate law” (1993) 50 Washington & Lee LR 1373 at 1374.
19 Ibid, at 1375.
20 Ibid.
21 Ibid.
22 Ibid.
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