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Corporate and Business LawSection BSyllabus FManagement and AdministrationMTQ

ACCA · Question 55 · Corporate and Business Law

SCENARIO 4: AquaGrid PLC, a regional water utility, is considering a major infrastructure upgrade. The board of directors is split. Director A wants the cheapest option to maximize short-term shareholder dividends. Director B wants a more expensive, eco-friendly option, arguing it benefits the local community and ensures long-term sustainability, even if it reduces dividends this year.

Under Section 172 of the Companies Act 2006 (Duty to promote the success of the company), which approach is legally correct?

Answer options:

A.

Director A's approach is strictly required, as shareholder wealth maximization is the only legal consideration.

B.

Director B's approach is more aligned with s.172, as directors must have regard to the long-term consequences, the community, and the environment.

C.

Neither; the directors must let the shareholders vote on operational infrastructure decisions.

D.

Director A's approach, because environmental factors are strictly voluntary CSR initiatives.

How to approach this question

Apply the concept of 'enlightened shareholder value' found in Section 172 of the Companies Act 2006.

Full Answer

B.Director B's approach is more aligned with s.172, as directors must have regard to the long-term consequences, the community, and the environment.✓ Correct
Section 172 of the Companies Act 2006 requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, they MUST have regard to several factors, including: the likely consequences of any decision in the long term, the impact of operations on the community and the environment, and the desirability of maintaining a reputation for high standards of business conduct. This is known as 'enlightened shareholder value'.

Common mistakes

Believing that UK company law requires ruthless, short-term profit maximization at the expense of all other factors.
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