Enlightened Shareholder Value

Introduction

Enlightened shareholder value (ESV) is a UK approach to directors’ duties that links long-term company success with wider factors such as people, reputation, community and the environment. It sits in the Companies Act 2006, most clearly in section 172, which asks directors to act, in good faith, in a way most likely to advance the company’s success for the benefit of its members as a whole. In doing so, boards should weigh long-term results against short-term figures and consider the impact of decisions on employees, suppliers, customers and society.

This guide explains the law, how the courts assess directors’ judgement, what happens near insolvency, realistic boardroom steps, and options open to shareholders.

What You'll Learn

• What ESV means under the Companies Act 2006, especially section 172
• The specific factors directors should have in mind when advancing the company’s success
• How the good faith test works, and the link with the duty to act within powers (s171)
• When creditors’ interests take priority (Sequana) and why it matters
• How objects and stated purposes affect decision-making
• Practical steps for boards: papers, minutes, stakeholder engagement and reporting
• Shareholder tools: meetings, resolutions, derivative claims and unfair prejudice
• Key cases and a quick checklist for everyday use

Core Concepts

Section 172 CA 2006: what it requires

Directors must act, in good faith, in a way they honestly consider would most likely advance the success of the company for the benefit of its members as a whole. While doing so, they should have regard to:

• Likely long-term consequences of decisions
• Interests of the company’s employees
• The need to maintain good relationships with suppliers, customers and others
• The impact of operations on the community and the environment
• The desirability of maintaining a reputation for high standards of business conduct
• The need to act fairly as between members

Two extra points matter:

• Section 172(2): if a company’s purposes include aims other than benefit for members (for example, a charity or purpose-led company), the duty is applied by reference to those purposes.
• Large companies must publish a section 172 statement in their strategic report explaining how these factors were considered (s414CZA CA 2006).

Good faith, judgement and proper purpose

How do courts review board decisions?

• The section 172 test is largely subjective: did the director honestly believe the decision would advance the company’s success? The court avoids hindsight. See Regentcrest plc v Cohen [2001] 2 BCLC 80.
• There are guardrails. Directors must also comply with section 171 (act within the company’s constitution and for proper purposes). Even an honest belief cannot save a decision taken for the wrong purpose (for example, issuing shares to entrench control).
• Process matters. Boards should show that relevant factors were considered, that material information was obtained, and that any conflicts were managed (s175–177).

When creditors’ interests matter

Section 172(3) preserves rules requiring directors to consider creditors’ interests in certain situations. The Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25 clarified:

• The “creditor duty” is part of the directors’ duty and arises when the company is insolvent, bordering on insolvency, or insolvency is probable.
• As the financial position worsens, increasing weight must be given to creditors’ interests. If insolvent liquidation or administration becomes inevitable, creditors’ interests are overriding.
• Before that point, directors may prefer a course they honestly believe benefits members overall, provided they give proper weight to the risk to creditors.

Key Examples or Case Studies

BTI 2014 LLC v Sequana SA [2022] UKSC 25

• Context: A dividend was paid while a long‑tail environmental liability created a real insolvency risk.
• Key point: The duty to consider creditors’ interests arises when insolvency is probable or the company is insolvent, and intensifies as financial distress increases.
• Use it: Build solvency assessments into board papers. When risk rises, document how creditors’ interests were considered.

Regentcrest plc v Cohen [2001] 2 BCLC 80

• Context: Transactions were challenged after the event as not in the company’s interests.
• Key point: The court asks what the director honestly believed at the time, not whether the decision later turned out well. Evidence of careful consideration helps.
• Use it: Record the commercial rationale and the section 172 factors in minutes. Avoid bare assertions; show the reasoning.

“Eco Cars Ltd” (illustrative scenario)

• Context: A company with objects focused on electric vehicles considers switching to diesel to chase short‑term profit.
• Key point: Under CA 2006, companies have unrestricted capacity unless their articles limit it (s31). If the articles do restrict purpose, directors who act beyond those limits risk breaching section 171 (act within powers) and section 172. Third‑party contracts may still be valid (s39–s40), but directors can be liable internally.
• Use it: Check the articles before major strategy shifts. If the business purpose has moved on, propose a special resolution (75%) to amend the objects and explain the section 172 reasoning.

Practical Applications

• Build section 172 into board papers

  • Decision summary: what is being approved and why
  • Long-term view: likely consequences over time
  • Stakeholders: employees, customers, suppliers, local community, environment
  • Reputation: conduct and compliance considerations
  • Fairness between members: any differential impact?
  • Financial robustness: cash flow, covenants, solvency indicators
  • Alternatives considered and reasons for the preferred option
  • Conflicts: declare and manage under ss175–177

• Minute the discussion

  • Record material information considered and external advice (legal, financial, technical) where relevant.
  • Note who was consulted (for example, workforce panel, key suppliers) and the outcome.
  • Capture dissent and why the majority view was taken. Avoid boilerplate.

• Address near‑insolvency risk promptly

  • Add a standing solvency item to agendas when headroom tightens.
  • Run downside scenarios; assess probability of insolvency.
  • As risk grows, give increasing weight to creditors’ interests; consider standstill or restructuring options early.
  • Seek advice and record why the chosen path best balances risks.

• Align purpose and constitution

  • Review objects and any purpose statements after major strategy changes.
  • If articles restrict activities, seek a special resolution (s21 CA 2006) to amend them, with a clear section 172 narrative.

• Reporting and disclosure

  • For companies in scope, prepare a clear section 172 statement in the strategic report (s414CZA): explain the main board decisions and how statutory factors were considered.
  • Ensure consistency across the annual report, sustainability reporting, and market announcements.

• Common pitfalls to avoid

  • Treating section 172 as a tick‑box exercise without real discussion.
  • Ignoring employees’ interests during restructurings.
  • Using share issues or buy‑backs for an improper purpose (for example, entrenchment).
  • Overlooking creditors’ interests when the balance sheet or cash flow weakens.

• Practical steps for shareholders

  • Engage with the board and request details of the decision-making process.
  • Requisition a general meeting (s303 CA 2006) or propose resolutions.
  • Remove a director by ordinary resolution (simple majority) under s168.
  • Consider a derivative claim (ss260–263) for breach of duty; court permission is required.
  • If personal rights are affected, consider an unfair prejudice petition (s994).
  • Seek an injunction to restrain an imminent breach of the articles or directors’ duties where appropriate.

Summary Checklist

• Know the section 172 factors and apply them to every major decision
• Record the long‑term rationale and stakeholder effects in board papers and minutes
• Keep an eye on solvency; give creditors’ interests increasing weight as risk rises
• Ensure decisions comply with the articles and proper purpose (s171)
• Manage conflicts (ss175–177) and make required declarations
• Align stated purpose and strategy; update articles where needed
• Prepare a clear, specific section 172 statement (if in scope)
• Use shareholder tools proportionately: meetings, resolutions, removal, derivative claims, unfair prejudice

Quick Reference