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3.3 Interests in the Company-Shareholders v Stakeholders
Traditionally, shareholders were regarded as the owners of the company and their
interests were the only interests to be recognised as the object of the company‟s
activity. 36 Hence a company is viewed as an association of shareholders formed for their
private gain, to be managed by its board of directors solely for that purpose. 37 To prevent
directors from diverting profits for their own purpose, the law has developed various
fiduciary duties. 38 As the residual claimants on the dividends i.e. after the claims of
employees, creditors and consumers have been made, shareholders are given rights under
the law to have the company managed for their benefit. 39
The separation of ownership and control has further contributed to the problem, although
in small companies most control remains with the shareholders who are usually the
directors. 40 Berle and Means found in their study that economic activities were mostly
carried out by large enterprise resulting in a wide spread of ownership. Ownership of
wealth lies in the hands of shareholders who invest their money (wealth) in the company,
while control is in the hands of the management who makes decisions on how this wealth
should be managed. A legal control to prevent directors from diverting profits from
shareholders into their own pockets takes the form of fiduciary duty. The law imposes
personal liability on directors who are found to have breached their duty towards the
company. Courts have also, in appropriate circumstances, been willing to ignore the
separate legal entity and held directors liable.
In contrast, the law perceived creditors as outsiders who are capable of protecting
themselves through contracts and other mechanisms. This is based on the assumption that
36 Ibid; Re Smith and Fawcett Ltd [1942] 1 All ER 542; Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286.
37 Ibid.
38 Ibid.
39 Ibid.
40 Berle and Means above n7 at 312-313.
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