Theorising Irish company law: locating Irish company law within entity theory

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Boland, Michael James
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University College Cork
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In terms of the contribution that this thesis will make to knowledge in the field, it will add three things. First, it will demonstrate the weaknesses in the contractarian and communitarian debate. Second, it will present entity theory as a framework for studying Irish company law and indeed other company law regimes that are built on the doctrines of limited liability and corporate personality. Third, it will show that Irish company law and most corporate law frameworks enable and support managerial discretion which this thesis refers to as the second pillar of entity theory. These findings converge on the conclusion that the core of decision-making in the company is made by management not by or even for shareholders. This is an important insight given that at the heart of the contractarian and communitarian debate is an assumption that the shareholders wield absolute authority and influence over corporate decision-making. It is true that shareholders in general meetings make important and consequential decisions about the governance, finance, activities and future of the company. Hence, the general meeting has aptly been described as the company's "supreme governing body". But the kinds of corporate decisions and actions that have tended to create tension in this debate are operational decisions such as plant closures, redundancies, outsourcing, tax avoidance, workforce welfare, investments, divestments, and others which are the preserve of management. This then leads to the conclusion that it is directorial or managerial primacy rather than shareholder primacy that is the guiding principle of company law. Contractarians and communitarians assume that the latter, shareholder primacy, is the goal around which company law pivots. But, in fact, shareholder primacy has no basis in company law. For instance, agency theory and the nexus of contracts paradigm which provide conceptual scaffolding for shareholder primacy are not products of law but rather of economics. The way in which agency theory and the nexus of contracts paradigm have been used by the contractarian and communitarian schools creates the impression that the 'company' is merely a collective noun denoting all the natural persons who form it, work in it, and do business with it. The effect of this is to overlook the nineteenth century company law doctrine of corporate personality that provides that the company has a legal identity independent of those who formed it. This is referred to in this thesis as the first pillar of entity theory. The theoretical scaffolds on which the shareholder primacy debate has been waged over decades has led to this company law debate disregarding the fundamentals of company law and has, ironically, brought us back to a time when shareholders, as we understand that term today, did not exist as incorporation was still largely State controlled and limited liability was only in the research and development stage. Directorial or managerial primacy, on the other hand, is embedded in Irish company law and in the company law frameworks of other jurisdictions. As stated, this is a product of the separate legal personality of companies and is thus referred to as the second pillar of entity theory. The company as a legal person is run by a body of natural persons, the Board of Directors, who make day-to-day decisions on behalf of the company. The law reserves certain categories of decision-making to shareholders as mentioned above but only mandates that shareholders meet every fifteen months. In fact, the law permits companies to dispense with the requirement to hold general meetings provided that the shareholders sign a resolution confirming that they approve of the company's financial statements and directors' report and that they agree with any proposed reforms needing their consent. Moreover, company law statutes in Ireland, the UK, and across the US explicitly vest the interests of the company in the hands of the directors. In the UK, the directors must "act in the way [they] consider, in good faith, would be most likely to promote the success of the company". In the US State of Minnesota, for example, it is the Board of Directors who has discretion to decide what is in the "best interests of the corporation". Like in its UK equivalent, the Minnesota provision, which is typical of similar provisions across the US, contains a non-exhaustive list of constituencies to which directors can have regard in exercising their discretion ranging from employees to "societal considerations". In the context of Ireland, it is the directors who must "act in good faith in what [they] consider to be the interests of the company". It is the directors who are empowered by statute to manage the business of the company - a power that was granted by the governing documents of the company (the articles of association) under the previous company law regime but is now contained in statute thus further codifying directorial discretion in Irish law. And, quite apart from being shareholders' agents as the contractarian and communitarian schools of thought believe, it is the directors who enjoy "the most unfettered of powers" under the Act to refuse to register a shareholder on the register of members subject to the one condition that they exercise that power in good faith in the interests of the company. In fact, with the exception of Section 224 regarding the consideration of employee interests and Sections 228(1)(h) and 228(3) concerning members' interests, there is no reference to the interests of shareholders in the Act and, most definitely, no requirement to maximise shareholder wealth. Even those statutory provisions - Sections 224, 228(1)(h), and 228(3) - support managerial discretion by giving management discretion to consider the welfare of employees if they believe that to do so will add value to the company and, in the case of a nominee director, to consider the interests of their appointer notwithstanding their duty to the company as a whole where this does not harm any other party's interests in the company. So, far from being restrictive, which is what a narrow shareholder-focused view of Irish company law would suggest, Irish company law is permissive in that it allows directors as "administrators" the discretion to make decisions and to deal with corporate assets on behalf of their principal, the company.
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Corporate law , Corporate law theory , Managerial discretion , Sustainability , Companies Act 2014 , Ireland , Tax , Environment , Corporate culture
Boland, M. J. 2023. Theorising Irish company law: locating Irish company law within entity theory. PhD Thesis, University College Cork.
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