A culture of mistrust and misery

Welcome to my next article, as explained previously this article is not intended to be a legal document and nor shall it be used for any other purpose than educational and simple curiosity.

Businesses and companies never seem to obtain a positive viewpoint from the public. ‘Scandalous’, ‘thieves’, ‘greedy’ are all common adjectives applied, and with good reason. As many of you will know, there are two types of businesses, registered businesses which are take the form of “a company” and unregistered businesses which are often referred to one-man businesses, partnerships, independently owned etc. This article will cover the nature of the registered companies and why they are not viewed particularly well. I will cover two topics, whether shareholders and directors be mutually exclusive from one another, and more politically, the power and deception arising from institutional investors.

Firstly, we begin with the relationship between shareholders and directors. In the Companies Act 2006, it is explained that there must be at least 2 shareholders and a director of a company, whereby the company is split between ownership and management. Whereby, the ownership element consists of the shareholders (or often referred to as members), and the management is the directors. Theoretically, these should be separate people, but often in smaller companies, the directors are the shareholders, and I will explain why this becomes problematic. The shareholders of the company are bound to have an annual general meeting, to discuss any proper arrangements that the company needs on a larger scale, including the hiring or removal of a director(s); they effectively owe a duty to themselves to make the company grow to increase their earnings on their investments. The directors are in charge of the day-to-day management of the company, and they have duties in Sections 170–177 of the Companies Act 2006. Effectively, they have duties to promote the success of the business, in other words owe a duty of care to the shareholders of the company, and to not trade in situations of conflict, as they owe their loyalty to the company they are assigned to. Now, it seems simple enough to assume that if a director and shareholder become the same person, then they can carry out these duties as effectively they are just promoting the company’s success, which is effectively themselves. However, many issues have been raised by the past to suggest otherwise; a case known as Ng Eng Hiam v Ng Kee Wei (1964), raised an issue here. There were two shareholders, who were also directors, they both owned 50% of the shares each, they had a decision to make, and both wanted to go separate ways, but they could not come to a decision as directors, they also could not come to a decision as shareholders (obviously), and due to them owning identical portions of the company, the company got stuck at a standstill, and the court ordered for it to be wound up. Should there have been two different directors, who did not have monetary attachment to the company, a decision may have been made. Another case called Ebrahimi v Westbourne Galleries (1973), this was a company run by two relatives, who were both directors and shareholders. One of the shareholders, introduced their son into the company and naturally this shareholder and their son had the majority shares in the company. Quite obviously, there was a disagreement between the two original relatives and therefore the shareholder and his son, outvoted the single shareholder, and thus he was removed from his directorship (note he was still a shareholder), however now that single shareholder can not make decisions to affect the company, as a consequence of his removal as a director. This, quite clearly, was a manipulated effort to take whole control of the company and the use of his son made that quite possible, and hence another issue to the registered company structure. Finally, a case called Bushell v Faith, highlighted that a single shareholder gave himself enhanced voting rights, by increasing the voting rights of his shares, which meant that every single decision he made was passed, and if he wanted to remove a director from office, he could do so, simply because he had enhanced voting rights. However, this meant that the shareholder/director could act in any way he saw fit. Many thanks, that the courts resolved this quite efficiently, however, this problem did arise, simply out of the fact these roles can be occupied by one person.

The second issue is the role of institutional investors and their powers in political and economic decisions. An institutional investor is considered to be a powerful investor amongst public trade. The majority of what I have spoken about is small private companies, however, institutional investors, like Goldman Sachs, and J.P. Morgan can have wild effects on the public stock market, and certainly have the ability to cause extensive problems in the future. For example, let’s look at the role Goldman Sachs played in Greece’s acceptance into the European Union. Prior to their acceptance, they were a country undergoing financial struggle, and a condition to join the European Union (under the Masstricht Treaty) is to show financial improvement, at the time Greece was doing quite the opposite. Goldman Sachs, decided to sneakily tip things in Greece’s favour; simply put, they did a currency swap and managed to disguise, in the region of, $10 billion of debt, through “funding” from Goldman Sachs through complicated currency swaps. This disguise actually convinced the EU, a powerful and resourceful institution, to allow them into the Eurozone. Surprisingly, this is not the worse part, when this deal was struck the 9/11 bombings had occurred not so later. You may ask as to why I included this piece of information because 9/11 was no where near Greece; however, Goldman Sachs is based on Wall Street. The formula used to calculate Greece’s repayments has contingency’s, one of which was activated due to the terrorist attack, which resulted in the debt repayments from Greece to almost double, from $2.8 billion extra to $5.1 billion extra. Goldman Sachs, after expenses profited $450 million, and resulted in Greece’s financial situation to worsen, even more so than the situation they were in before Goldman Sachs ever intervened. The point I am trying to highlight, is Goldman Sachs, did not only convince the EU that Greece was succeeding through deception, but they also crippled what was left of Greece’s economy. Of course, it is only speculative to assume the EU had no idea what was going on with the finances, but after this event, distrust and secrecy plagued the minds of banks and investors, more so than ever.