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Lloyd's Maritime and Commercial Law Quarterly

Improper purposes in company law

Robert Boadle*

The UK Supreme Court’s decision in Eclairs raised, but did not decide, at least four difficult questions for English company law. First, does the existence of any improper purpose render voidable a purported exercise of power under the Companies Act 2006, s.171(b)? Secondly, how should a court identify the substantial purpose among multiple purposes for exercising a power? Thirdly, should English law adopt a “but-for” test of causation to assist with identifying what is an improper exercise of power under s.171(b)? Finally, what are the general law limits on the proper exercise of shareholder power? This article explores, and attempts to provide answers to, these four difficult questions.

I. INTRODUCTION

One of the most fascinating developments in economies across the world today is the rise of new organisational forms. By way of example, “decentralised autonomous organisations” (“DAOs”) seek to automate ownership, control and management and limit or remove human involvement by operating according to agreed rules to achieve specific projects or goals. One might conceptualise a DAO as an entity operating in a cryptographic economy to achieve goals for humans operating in the real economy. It might be thought of as a company without a need for human management. A perceived benefit of such a structure is the elimination of economic inefficiencies inherent in any structure that requires a paid manager to perform tasks on behalf of those who want them performed. The company structure, on the other hand, requires members to place a degree of trust in the paid manager that he or she will carry out his or her duties in the interests of the members. If this trust is breached, company law has developed a sophisticated set of rules that afford the members redress against the manager. But the application of these rules can be uncertain, and it costs time and money to bring a manager to heel. Proponents of new organisational forms such as DAOs seek to remove this inefficiency by eliminating the need for trust. Why trust (and perhaps more importantly, pay) a manager when the goal can be achieved without one? While these new organisational forms are bound to encounter the types of problem that necessitated the creation of a role for a trusted intermediary in the first place, their emergence is a clear sign of dissatisfaction with the present order. How the law responds to these challenges to the corporate form is a matter of great importance; we should all be thinking about the immediate consequences of the rapidly accelerating automation of our economic system.

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