The thick end of the wedge: Good faith in the corporate constitution

Research output: Contribution to conferencePaper

Abstract

The so-called “statutory contract” under the Companies Act 2006, s 33 is no contract at all. It is a constitution; a constitution that divides powers between the company, acting through its board of directors, and the shareholders. Mischaracterising the constitution as contract may unjustly dismiss shareholder concerns when the constitution is changed or power exercised contrary to what was agreed upon. The longevity and potential for informality in corporate context makes it impossible to plan for all contingencies that may arise to say that the minority ‘bargained’ for this or that outcome.
Legal authorities have looked to mitigate the risk to minorities by asserting that the constitution is subject to ‘good faith’ interpretation. However, the mischaracterisation of the constitution as contract has led to inaccurate attempts to classify such a control as a ‘term’. At best, only a ‘thin’ understanding of a good faith term can be used in the corporate context. A ‘thick’ understanding of good faith would be contrary to the rule of law. Furthermore, it is beyond the authority of the court to adopt a ‘thick’ understanding of good faith because Parliament has already legislated for when the court may interfere via the unfair prejudice petition. Normatively a good faith term should also be denied. While some argue that a good faith term would reduce transaction costs, mischaracterising a good faith control as contractual rather than constitutional removes the legitimacy of the exercise of constitutional powers, that may sometimes require compromise and make-do to balance interests of different constituent groups, with rational and certain rules that can be manipulated by majorities and further harm the minorities the good faith term was meant to protect. This, in turn, may increase transaction costs through diminishing legal certainty that a factual test of good faith would bring.
Original languageEnglish
Publication statusUnpublished - 2024
EventSociety of Legal Scholars: Rethinking Company Law - University of Newcastle, Newcastle, United Kingdom
Duration: 21 Mar 202422 Mar 2024

Conference

ConferenceSociety of Legal Scholars: Rethinking Company Law
Country/TerritoryUnited Kingdom
CityNewcastle
Period21/03/2422/03/24

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