Comparative Paper on Corporate Purpose

Professor Afra Afsharipour has
posted on SSRN a paper titled “Redefining
Corporate Purpose: An International Perspective
”, the abstract of which is
as follows:
Over the past
decade, corporate law in India has begun a reform journey with important
implications for not only corporate governance, but also for deeper questions
about the purpose of the corporation and beneficiaries of the corporate form.
Following years of debate and attempts at reforms that began in the late 1990s,
the reform efforts culminated in the 2013 Companies Act. In designing India’s
new corporate law, policymakers grappled with the subject of corporate purpose
and determining which institutional structure is in the best place to further
the purpose of the corporation. When viewed holistically, the Companies Act is
a radical experiment with corporate purpose. The Companies Act does not
specifically detail the concept of corporate purpose, other than stating that a
company may be formed for any “lawful purpose.” Nevertheless, the Act’s various
provisions regarding board fiduciary duties and responsibilities make clear
that shareholder wealth maximization should no longer be the primary lens for decision-making
by Indian boards. One of the most essential provisions of the Act declares that
corporate directors “shall act in good faith in order to promote the objects of
the company for the benefit of its members as a whole, and in the best interests
of the company, its employees, the shareholders, the community and for the
protection of environment.” Moreover, the Act’s code for independent directors
requires them to “safeguard the interests of all stakeholders” and to “balance
the conflicting interest of the stakeholders.” These duty-focused provisions
are then bolstered by several other important provisions including those
relating to CSR spending and disclosure and, in some cases, stakeholder access
to board members. The substantive reforms of the Companies Act are overlaid
with an extensive disclosure regime that envisions a vast increase in corporate

India’s new corporate law in many ways both
mirrors and moves beyond debates in other parts of the world to redefine the
purpose of the corporation. Given the large extent to which corporate law in
India looks at comparative examples from other common law jurisdictions, this
Article primarily focuses on comparative developments in the U.K. and U.S. In
the U.K., for example, the concept of “enlightened shareholder value” was
introduced through statute with passage of the U.K. Companies Act 2006.
Similarly, while India was undergoing its debates regarding corporate purpose,
the U.S. was debating the purpose of the corporation and experimenting with
different forms of business entities, such as benefit corporations, aimed at
moving away from the claim that the law requires shareholder wealth
maximization as the primary purpose of the corporation.

Overall, India’s reforms suggest that India intends
to transform corporate purpose beyond the ESV model adopted in the U.K.
Moreover, unlike the U.S. move to allow for benefit corporations, India’s
transformation of corporate purpose does not apply to a mere subset of
entities, but instead contemplates an overhaul of corporate vision in Indian
firms. Nevertheless, there is reason to doubt that the specific legal
provisions provided by the Companies Act will in fact lead to substantive
structural change given the various forces and institutions that may stand in
the way of redefining the purpose of the Indian firm.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • So does that mean that both winding up under section 433 of CA 1956 and IRP are in place? Then which remedy to pursue?

    Additionally, Government has also notified section 255 of Insolvency code on 15 November. Section 255 amend CA 13. Few provisions thereby amended deal with winding up of companies (section 271). Does that mean that winding up under new act is also enforced, that too without repealing winding up under CA 1956.

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