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W7 Workbook Week 7 - 2106afe
Company Law (2106AFE)
Griffith University
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2106AFE Company Law Workbook No. Workshop Objective Key Law Key Reading 1 Define corporate governance and how it relates to directors duties 2 Explain and apply section 181(1)(a), in particular the key words: powers and discharge interests of with reference to relevant case law Darvall v North Sydney Brick ASIC v Kinsela v Russell Kinsela Pty Explain and apply section 181(1)(b), in particular the steps taken to identify whether the exercise of power was for a with reference to relevant case law Mills v Howard Smith Ltd v Ampol Petroleum Whitehouse v Carlton Hotel Pty 4 Explain and apply the difference between a direct and indirect conflict of interest Transvaal Lands Co v New 5 Explain and apply the circumstances in which a director has to disclose their conflict of interest to: (a) and (b) shareholders Furs Ltd v Grand Enterprises Pty Ltd v Aurium Resources 6 Explain and apply the circumstances in which a director can vote or be present at a meeting 194, 195 7 Explain and apply section 182, in particular the key words use an advantage cause with respect to the relevant case law Cook v Grove v Mordecai v Queensland Mines (QM) v ASIC v Regal Hastings v 8 Explain and apply section 183, in particular the key words information because officer or use the an advantage cause McNamara v ASIC v Vizard 3 Know it? 1 Contents Director Duties............................................................................................................. Corporate Governance............................................................................................. Difference between fiduciary and statutory duties................................................... Who owes duties under CA?.................................................................................... Video: Duty to act in Good Faith.............................................................................. Video diagrams........................................................................................................ Video: Duty to act for a Proper Purpose................................................................ Video diagrams...................................................................................................... Civil and criminal penalties..................................................................................... Duties: Conflicts of Interest....................................................................... Video: Conflict of interest....................................................................................... Video diagrams: Conflict of interest....................................................................... What is a conflict of interest?................................................................................. What is the interest?............................................................................... When, how and who do the directors disclose their interest?................................ Can directors vote and be present at the meeting?............................................... Duties: Improper Use of Position.............................................................. Video: Improper use of position............................................................................. Video diagrams: Improper use of position............................................................. Duties: Improper Use of Information......................................................... Video: Improper use of information........................................................................ Video diagrams: Improper use of information........................................................ ASIC v Vizard......................................................................................................... Workshop exercises: to be completed in class......................................................... Workshop Exercise 1............................................................................................. Workshop Exercise 2............................................................................................. Workshop exercise: for you to do before class......................................................... Workshop Revision Question.................................................................................... Workshop Revision Answer................................................................................... Duties: What to put in your Law and Application...................................... 2 Director Duties Corporate Governance What is corporate governance? Corporate governance: Is the term used to describe the rules and practices put in place within a company to align the interests of management with the interests of shareholders and other stakeholders (such as Can relate to such areas as remuneration, responsibilities of company officers, disclosure of information and risk management systems. How does corporate governance relate to duties? The rules of corporate governance are a mix of and legal regulation. The statutory (in particular CA) and fiduciary duties of directors represent minimum corporate governance requirements. Difference between fiduciary and statutory duties You will notice that the text discusses the fiduciary duties of directors and statutory duties separately. The reason for this is that before company legislation, the common law set out the duties directors owe to the company, known as fiduciary duties. Those fiduciary duties have been put into the legislation. This means that the CA duties and common law fiduciary duties are very similar. The main fiduciary duties of a director are: To act in good faith, in the best interests of the To avoid conflicts of To not make a secret and To act for a proper purpose. Although the CA does not override the common law fiduciary duties (section 185 CA confirms this), most reported cases now rely on the CA as opposed to the common law. So this is how I am going to approach duties to avoid any confusion: 1. We will focus on the CA and 4 2. As the common law imposes similar duties on directors to the CA, the cases can be still be used as precedent. In other words, the cases help you understand how the Court would apply the CA. A key difference between common law and statutory duties concerns who can take action against a director or officer for breach of duty. The ASIC or company can take action against an officer for a breach of statutory duties, whereas the company can take action against the director for a breach of fiduciary (or common law) duties. Please bear this in mind when reading the material. Who owes duties under CA? The CA duties cover more people than just directors. The CA imposes duties on directors, officers and (in the case of employees of a company. is defined in s 9 CA and includes a person: who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation (e. Rodney Adler in Adler v or who has the capacity to affect significantly the financial or in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given the person in the proper performance of functions attaching to the professional capacity or their business relationship with the directors or the corporation). So this means that senior management could also be considered in particular circumstances. Whilst the textbook adopts the popular description of note that the duties do extend to officers and employees. Video: Duty to act in Good Faith Section 181 provides that a director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the and (b) for a proper purpose following videos provide a description of the duty to act in good faith, as well as a summary of the ASIC v Adler case. The relevant diagrams used in the video are available in the next section. Video: Duty to act in Good Faith Video: ASIC v Adler 5 ASIC v Adler HIHC (subsidiary of HIH) million payment Adler Corporation PEE m HIH shares Unsecured loans to Adler and associated entities 3 IT Comm companies owned Adler Corp What is good faith? To act in good faith is to act legitimately. It is not enough for a director to say that they were acting honestly when performing a duty or exercising a power. Good faith also involves an objective test, namely, a reasonable person in the position and circumstances would have considered such acts to be in the best interests of the company. Thus, an officer can breach section 181 even if they honestly believed that their actions were in the best interests of the company. As the court in Hutton v West Cork Railway Co correctly pointed out, if the court were to rely on the subjective test only, a lunatic could conduct the affairs in a way that he or she considers OK but the rest of the world deem irrational and still comply with the law. What are some examples of an officer breaching the duty of good faith? Providing personal benefits to directors or particular members Undertaking transactions with directors or particular members on terms very favourable to them 7 Forgiving debts owed to the company directors Transferring company assets to others in an attempt to avoid recovery creditors or receivers Best interests of corporation What is the interests of the depends on whether: The corporation is The relevant officer is a nominee The corporation is part of a corporate group. Shareholders as a group If the company is solvent, the exercise of power or duty must be in the best interests of the shareholders as a collective group, not individual shareholders, and have regard to the interests of present and future shareholders: Darvall v North Sydney Brick and Tile Ltd. This means that officers must have regard to interests of a company as a commercial entity even when it may not be in the interests of current shareholders. Creditors If the company is insolvent or is approaching insolvency, the interests of the company are those of its creditors. Directors have a duty to exercise their powers in a way which does not prejudice the ability to pay its creditors: Kinsela v Russell Kinsela Pty Ltd (in liq) Individual Shareholders The general rule is that officers do not owe duties to particular shareholders: Percival v Wright. In special circumstances, directors may owe duties to particular shareholders, namely: The officer controlled a close relationship with a and The officer used the control to the detriment in a transaction The case example in your textbook is Brunninghausen v Galvanics 8 Employees Directors should not consider the interests of employees ahead of the interests of the company as a whole (Parke v Daily News Ltd). Video: Duty to act for a Proper Purpose What is a proper purpose? The Courts do not judge the effect of an exercise of power (e. whether the business decision is good or bad), but the purpose of the exercise. Where the power is exercised for a proper purpose the decision will not be disputed the courts. A video on the duty to act for a proper purpose is provided below with a summary of two key cases: Ampol and Whitehouse. Video: duty to act for a proper purpose Video: Ampol and Whitehouse cases (proper purpose) Video diagrams Whitehouse v Carlton Hotel Carlton Hotel class: W Voting rights whilst alive class: Voting rights on death class: children W attempted issue of more class shares to the sons 10 Howard Smith Ltd v Ampol Petroleum Miller shares takeover bid share issued shares Howard Smith: facilitate takeover bid share How do you work out 1. Identify the power 2. Identify the purpose or purpose(s) of the 3. If there is more than one purpose, identify the purpose. To identify the use the test: would the officer have exercised the power the purpose? (Whitehouse v Carlton Hotel Pty Ltd). 4. Determine whether the purpose is improper or proper referring to previous cases (see text) or alternatively, use an objective test: what would a reasonable person have done in the position of the officer in the circumstances? (Whitehouse v Carlton Hotel Pty Ltd). If the dominant purpose is improper, the exercise of the power will be a breach of section 181 CA. What are the common cases? There are two common situations arising in the cases involving proper purpose: In relation to private companies: A family disagreement involving an attempt to shift power from one group to another group within the family company In relation to public companies: a takeover battle the directors of the company want to the corporate raider. So they issue shares to a 11 Civil and criminal penalties Section 181 is a civil penalty provision (s1317E). This means that after the Court declares that there has been a contravention of a civil penalty provision, the Court can: o order the officer to pay compensation to the company for breach of the statutory duties o issue a pecuniary penalty order (i. a fine) of up to in particular circumstances (s 1317G). Note that a person who is with a breach of section 181 is deemed to have breached section 181 (s181(2)). Involvement in a contravention may arise where a person aids and abets, induces, is knowingly concerned in or is party to the contravention (s79). Criminal Liability: A director or other officer of a corporation commits an offence if they are reckless or intentionally dishonest and fail to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose (s184(1)). Injunction: A court may grant an injunction under s1324 in respect of threatened or actual breaches of s181. Proceedings can be taken against anyone who contravenes the law or attempts to do so, and anyone who aids, abets, counsels or procures the contravention (refer s 79). Disqualification from managing corporations (s 206C) 13 Duties: Conflicts of Interest Video: Conflict of interest This video provides a detailed summary of the three major issues associated with a conflict of interest. First, is there a conflict of interest? Second, does the conflict of interest need to be disclosed, and if so, to whom? Third, can the director with the conflict of interest vote attend Board meeting during which a transaction involving the conflict of interest is being considered? Video: Duty with respect to conflict of interest Video diagrams: Conflict of interest What is a conflict of interest? Direct services contract Director A Company A Duties Director A Indirect (e. Transvaal Lands Aberdeen case) Company A Asset sale B to A Director Company B Shareholder C 14 Present at meeting voting on interest Issue: Can directors be present at the meeting or vote on the matter involving the material personal interest? Yes, provided director complies with s191 Pty Companies Law: s 194 (RR) Public Companies Law: s 195(1) Unless Constitution says otherwise No Unless Law: section 195(1A) Disclosure not required under s191(2) Other directors pass resolution approving director vote presence (s195(2)) ASIC makes declaration (s 195(3)) General meeting of members if quorum cannot be formed because of s195(1) (s 195(4)) What is a conflict of interest? Directors may put themselves in a situation where their duties to the company and their personal interests may conflict. Directors breach their fiduciary duty if they have undisclosed interests in transactions with their company as they are then in a position where their personal interests conflict or MAY conflict with the interests. 16 The duty to disclose conflicts of interest overlaps with the other statutory duties, such as the duty to act in good faith in the interests of the company (s 181) and not improperly use the position of director (s 182). For example, the requirement to disclose is designed to prevent directors from improperly making a profit from their position. What is the interest? The undisclosed interest can be direct or indirect. A director that contracts personally with the company has a direct interest. An indirect interest in a contract occurs when the director is a director or shareholder of another entity that contracts with the company. Case example is Transvaal Lands Co v New Belgium (Transvaal) Land Development Co When, how and who do the directors disclose their interest? Shareholders at general meeting The common law rule is that disclosure of a conflict of interest must be made to the general meeting for the purpose of obtaining the consent (Furs Ltd v Tomkies). That consent has the effect of ratifying the actions. The constitution can override this rule so that approval the Board of directors is only required where there is a conflict of interest. A less strict approach to the rule was used in Queensland Mines Ltd v Hudson. Disclosure to the board was sufficient even though no formal disclosure was made to the general meeting. The disclosure was made to the Board, who represented the two shareholders as nominee directors. So effectively disclosure to the Board was disclosure to the members. There are two reasons why you need to know this common law rule. First, section 191 (see below) does not require disclosure of conflicts to be made at a general meeting. Second, section 193 provides that the CA has effect in addition to any common law rule or constitution provision about conflicts of interest. Directors Section 191(1) CA provides that: A director of a who has a material personal interest in a 17 The director discloses the nature and extent of the interest at a meeting before entering the or The interest does not need to be disclosed under s 191 CA. If the disclosure is made after entering the transaction, the company can avoid the transaction and the director is not entitled to retain the benefits under the transaction. Note that section 194 is a RR, so the constitution can modify the rules, for example, place restrictions on the voting entitlement. Public Company Section 195 CA provides that: A director of a public who has a material personal interest in a that is being considered at a is prohibited from voting on the matter and being present while the matter is being considered, unless: o disclosure of the interest is not required under o the other directors pass a resolution approving the entitlement to vote and be present (section or o the ASIC makes a declaration under section 196. If there are not enough directors to form a quorum because of the inability to vote and be present at the meeting, then a director(s) can call a general meeting for members to pass a resolution dealing with the matter (s 195(4) CA). Duties: Improper Use of Position Video: Improper use of position Section 182 CA provides that: An officer or employee of the Must not improperly use their 19 To gain an advantage for themselves or somebody or Cause detriment to the corporation A person (refer section 79) in the contravention is deemed to have breached section 181(2). The video below provides a detailed explanation of section 182 with relevant references to case law. Video: Duty not to improperly use position Video diagrams: Improper use of position Issue: Did person breach their duty under s 182? officer or employee (s 9) Section 182: Must not improperly use position Grove v Flavel: meaning of ASIC v Adler: focus on specific duties of that officer Section 182: To o Make a gain for the officer o Make a gain for somebody else o Cause detriment to the company ASIC v Vizard: Purpose, not effect, of improper use Section 182 examples: o Using company funds for own purpose Diakyne Pty Ltd v Ralph) o Diversion of corporate opportunity (Regal Hastings (Ltd) v Cook v Deeks, Mordecai v Mordecai) o Repayment of loans to director ahead of other creditors (Grove v Flavel) o Company consent to take commercial opportunity suggests that conduct is not improper (Queensland Mines (QM) v Hudson) 20
W7 Workbook Week 7 - 2106afe
Course: Company Law (2106AFE)
University: Griffith University
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