Commlaw notes for Exam - USE PDF

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Intro Define a director • •

Director: defined in s 9 A person who: – –

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Is appointed to the position of director (de jure director) Is appointed to the position of an alternate director and is acting in that capacity, regardless of the name given to their position;

And unless the contrary intention appears, a person who is not validly appointed as a director if: – They act in the position of director (de facto director); or – The directors of the company are accustomed to act in accordance with the person’s instructions or wishes (shadow director)

Duties Duties are both: – Positive – what directors and officers should do – Negative – what directors and officers should not do Director owes the fiduciary duty to the company as a whole. • • •

Means the members as a whole (Greenhalg v Arderne Cinemas Ltd [1946] 1 All ER 512) Owed to all shareholders and not just a particular shareholder (Percival v Wright [1902] 2 Ch 421) Also owed where a shareholder is so reliant on the director for information and advice, and where the director is in a position of particular advantage to the member and special circumstances (eg negotiations to sell the business) allow the director to exploit the member (Brunninghausen v Glavanics (1999) 17 ACLC 1247)

Standard of care •

Any director must have the basic skills to understand the business of the company and its financial status – Officers must read, understand and focus on the contents of the company’s financial statements that they are required by law to approve and adopt (ASIC v Healey (2011) 83 ACSR 484) –

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Executive and non-executive directors must understand the financial liabilities of the company (ASIC v Hellicar and ASIC v McDonald (2012) HCA 17) Executive directors should be subject to a higher standard of care than non-executive directors by reason of their contractual employee status (Daniels v Anderson (1995) 13 ACLC 614) – The test is what a reasonable person in the same position would do (ASIC v Vines (2006) 24 ACLC 165) – For a non-executive director, the standard of care is tested by referring to the knowledge and expertise possessed by other people with the same skill and expertise

Define issue Loyalty

Party – who breached? Statute Duty of care, skill and diligence – s 180 •

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Elements: – –

Director or officer [note: not employee] Must exercise their powers • AND

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Discharge their duties With the degree of care and diligence that a reasonable person would exercise if they: • Were a director or officer of a corporation in the corporation’s circumstances AND

• Occupied the office held by and had the same responsibilities as the relevant director or officer Essentially objective – – –

But s 180(1) does take into account the particular circumstances of the company, particular office held by the director and the responsibilities of that director in that company : Daniels v Anderson (1995) 13 ACLC 614 ‘responsibilities’ are not confined to tasks expressly delegated to the director: ASIC v Rich (2009) 75 ACSR 1, 614. No regard to the purely personal circumstances of the relevant director

Skills “particular role, responsibilities of a director etc. is taking into consideration” “A non-executive director, the skill set is considered. Therefore would a reasonable person act in this way…”

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All directors must possess certain basic non-reducible skills – Enabling them to at least understand the operation of the company and its financial affairs – Other specific skills may be expected, depending on the circumstances of appointment A director will be expected to exercise that degree of diligence that will enable them to be informed about the company’s affairs and financial position

Diligence • Directors’ meetings: • Attendance must be disclosed in director’s report (only for Limited companies) •

‘[T]he responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. The board of AWA met only once a month for half a day. But to our mind the board should meet as often as it deems necessary to carry out its functions properly.’ Daniels v Anderson (AWA Appeal) (1995) 37 NSWLR 438, 501. • Failure to hold meetings held to be a breach of s 180: Sheahan (as liquidator of SA service stations) v Verco [2002] SASC 69 • Ensuring people delegated to have appropriate skills to handle task delegated to them (ss 189-190) DEFENCE S180 (2) The business Judgment Rule A director or other officer of a corporation is taken to meet the requirements of the duty of care if they make a business judgment and they: (a) make the judgment in good faith for a proper purpose; (b) do not have a material personal interest in the subject matter of the judgment; (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. • • • • •

The director's or officer's belief that a judgment is in the best interests of the corporation “is a rational one unless the belief is one that no reasonable person in their position would hold”. Section 180(3) defines "business judgment" to mean “any decision to take or not take action in respect of a matter relevant to the business operations of the corporation”. “Safe harbour” for unsuccessful business decisions, but this is not inviolable • Protects against breaches of s 180 and its common law equivalents Only applies where there is a breach of duty of care under s180(1) Only applies if the director rationally believes that the judgement (decision) is in the best interests of the company

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ASIC v Adler (2002) 20 ACSR 72 The director’s belief will be considered rational unless the belief is one that no reasonable person in their position would hold - ‘A rational belief exists if the director believes that his judgement was in the best interests of the company and that belief is supported by a reasoning process that is rational’ (ASIC v Rich 27 ACLC 2139) Examples of BJR: Directors not entitled to rely on BJR as had personal material interest. Onus? • Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1 • No business judgment where director lacked interest in co’s affairs • •

• Gold Ribbon Accountants Pty Ltd (in liq) v Sheers [2006] QCA 335 Receivers can rely on BJR • Deangrove v Buckby (2006) 56 ACSR 630 Director has onus. Decision not to comply with disclosure obligations was not related to the business operations of the corporation but rather to compliance with the Act • ASIC v Fortescue (2011) 190 FCR 364

Go to CONSEQUENCES

Define issue Loyalty

Party – who breached? Statute Section 181 - Good faith and proper purpose Elements: • A director or officer [note: not employee] • Must exercise their powers and discharge their duties – –

In good faith in the best interests of the corporation • AND For a proper purpose

• Two limbs • This is a civil penalty provision What is good faith? •

Has been equated with honesty and this suggests a subjective test – Recall: Advance Bank v FAI Insurances Aust Ltd (1987) 5 ACLC 118 The duty of good faith – to act honestly has 2 components: 1) Subjective: act honestly – The director or other officer must genuinely and reasonably believe that they are acting in the best interests of the company 2) Objective: ‘reasonable person’ – Test: ‘whether an intelligent and honest [person] in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company’ (Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62) – This duty will be breached when ‘on consideration of the surrounding circumstances, the statement that the officers acted in good faith in the best interests of the company and for a proper purpose should not be accepted’ (Bell v Westpac Banking Corporation (2008) 70 ACSR 1) Best interests of the company – –

The best interests of the company are generally considered to be aligned with the best interests of the company’s members (shareholders) as a whole. Involves consideration of long-term benefit to the company – –

An action that is not in the immediate interests of the members may still be in the long-term best interests of the company Director may need to consider present and future members

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‘it is proper to have regard to the interest of members of the company, as well as having regard to the interests of the company as a commercial entity…it is proper to have regard to the interests of present and future members of the company, on the footing that it would be continued as a going concern’ (Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154) What is for a proper purpose? •

Test: – – – – –

Power is given for particular purpose/s and must be used for that purpose This is usually located in the constitution It will be breached if the substantial purpose of exercise of power was improper Bona fides is relevant but honest behaviour does not prevent a finding of improper conduct Where multiple purposes, would power have been exercised but for the improper purpose? •

(Permanent Building Society v Wheeler (1994) 14 ACSR 109)

But for test

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Directors and officers may be motivated by a number of purposes, some of which are proper and some of which are improper ‘But for’ test: asks whether the act would have been performed but for the reasons behind the improper purpose ‘As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, 'the power would not have been exercised‘ (Whitehouse v Carlton Hotel Pty Ltd (1987) 5 ACLC 421)

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Test is the same under common law and statute

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Breach of s 181 in ASIC v Adler  ASIC argued that Adler had breached s 181 in relation to the loan to PEE.  Adler caused PEE to buy, on market, $3.9m in HIH shares, but publicly stated that this was a personal purchase by him 

Adler was already a large shareholder of HIH, and this had the effect of improving the share price of HIH, which Adler took advantage of by selling the HIH shares owned by Adler Corp

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ASIC made the same argument against Williams and Fodera, but was unsuccessful (lack of diligence instead)

Common/equity law Duty to act in good faith and in the best interests of the company Common Law requires directors to always act in the utmost good faith in their dealings with or on behalf of the company. Breaches Good faith Advance Bank v FAI Insurances Aust Ltd (1987) 5 ACLC 118 Advance Bank v FAI Insurances Aust Ltd (1987) 5 ACLC 118 The duty of good faith – to act honestly 2 components: 1) Subjective: act honestly 2) Objective: ‘reasonable person’ e.g. directors may be in breach of good faith notwithstanding they honestly believed the decision was in the best interest of the Co if no reasonable person would believe the directors acted honestly

Duty to use powers for a proper purpose Mills v Mills (1938) 60 CLR 150 Per Dixon J “Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power.” Proper use of power: • Issues shares to raise extra capital Improper use of power • Issue shares to deliberately alter voting position of parties • To further directors own interests eg, maintain control Hogg v Cramphorn Ltd (1967) 1 Ch. 254 Even if directors honestly believed it was in the best interests of the company, if they issued shares to maintain control, then they are in breach of this duty.

Defences?

Define issue Loyalty

Party – who breached? Statute Material interests must be disclosed – ss191-196

Duties to disclose – ss 191, 195, Ch 2E S191 – Disclosure • Requires a director with material personal interest in a matter relating to company affairs to give the other directors notice of that interest • • •

Must disclose, unless exempt under s191(2) Section 192 provides for “standing notice” Notice not required in proprietary company if other directors aware

S195 – Voting • A director of a public company is, under s 195, prohibited from: – Being present during discussions of –

• AND Voting on

• Matters in which they have a material personal interest • Disinterested directors may resolve that the director can be present and/or vote (where Constitution doesn’t prevent it) S194 – Voting in PTY •

Director has a material personal interest and – discloses using procedure set out in s 191; or, – interest does not need to be disclosed under s 191

– Director may vote and transactions may proceed and director can retain benefits. • This is a replaceable rule Chapter 2E – related party transactions •

Aim: to protect a public company and its shareholders against un-commercial transactions entered into between the company and related parties without member approval: s 208 – Related Parties: directors, directors of entity that controls public co, person who make up controlling entity (where not co), and their spouses, parents and children, and entities controlled by them: s 228 – Financial benefit: s 229 broad interpretation, substance over form, non-exhaustive list includes providing finance, buying, selling, leasing asset, supplying or receiving services –

Exemptions where: • The terms of benefit are reasonable if dealing with each other at arms length (s210) • There is reasonable remuneration to officers (s211) • •

There is reimbursement of reasonable expenses of officers (s211), or The benefit does not discriminate against other members (s215)

Can seek approval • It is common for proprietary companies to have a provision in their constitution that allows directors to have a conflict of interest, provided the director discloses the interest •

– Only applies to proprietary companies Members at general meeting can ratify or approve actions of directors – Approve the conflict of interest –

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Not available for: • Breaches of statutory duties by directors (Forge v ASIC (2005) 23 ACLC 1010) • If it would defeat a members personal right

• If it constitutes fraud on the minority (Cook v Deeks) • If it would prejudice creditors Related party transactions (s208) –

If the financial benefit is not exempt, must be approved by members in general meeting • Related party cannot vote • Full disclosure must be provided so members can determine if it is in the company’s interests to pass the resolution approving the transaction

Improper Use of Position (182) and use of info (183) These sections do not depend on the directors’ intentional impropriety, or actual detriment An act may be improper regardless of the director’s belief that they are acting honestly: R v Byrnes (1995) 183 CLR 501 Objectively: Impropriety on the part of a director may be consistent with a breach of the standards of conduct expected of a person in the director’s position with the knowledge of the directors duties, powers and authority of that position Improper use of position – s 182 • Elements: – Director, secretary, officer or employee –

Must not • improperly • use position to

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Gain advantage for themselves or another • OR

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Cause detriment to the corporation Eg ASIC v Vizard (2005) 145 FCR 57 This is a civil penalty provision

Improper use of information – s 183 • Elements: – A person who obtains information because they are (or have been) a director, officer or employee – –

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Must not improperly use the information to Gain an advantage for themselves or another • OR

– Cause detriment to the corporation – Eg again, ASIC v Vizard (2005) 145 FCR 57 Continues after person ceases to be a director, officer or employee

• This is a civil penalty provision Relation to Adler: • Williams, through authorising the loan without proper approval from HIH’s investment committee, also used his position improperly

Common/equity law Conflict of interest •

A conflict of interest occurs if the directors or officers put themselves in a position where there is a conflict between their duties to the company and their personal interests – The duty to avoid a conflict of interest is strictly applied – actual motive is irrelevant – – – –

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Under common law, a director may only place themselves in a position of conflict if they have permission of the members of the company to do so The conflict can be real (actual) or perceived (substantial possibility) (Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41) ‘the reasonable man, looking at the relevant facts and circumstances of a particular case would think that there was a real sensible possibility of conflict’ ( Boardman v Phipps (1963) 3 WLR 1009) ‘no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those to whom he is bound to protect’ (Aberdeen Railway Co. v Blaikie Bros [1854] UKHL)

Undisclosed personal profits – A director is not permitted to benefit personally from their position in the company, even if there is also a benefit to the company –

• Furs Ltd v Tomkies (1936) 54 CLR 583 Must disclose the benefit and obtain the company’s consent • Different rules at common law and statute for obtaining consent

The relevant test is whether the profit is obtained because they were directors of the company and in the course of the execution of the office of directors of the company, and whether the company (by consent of members in general meeting) authorised the profit (Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134) • Competition with the company – A director may not engage in competition with the company •

– Clear conflict Misusing confidential company information or company funds – A director will usually be aware of and have access to substantial confidential information about a company that, if made public, could harm the company’s interests – A director is not permitted to use confidential company information for their own benefit

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A director is not permitted to use company funds for their own personal benefit • Paul A Davies (Aust) Pty Ltd v Davies [1983] 1 NSLWR 440

Disclosure in Common Law? No direct positive obligations to disclose conflicts of interest However: the defence to a claim of breach of the directors’ fiduciary obligation is the fully informed consent of the beneficiary (the company) Where there is a real, sensible possibility of conflict (Boardman v Phipps) there will be a breach of the no conflict rule – unless the company is made aware of the full facts, and consents to the behaviour Consequences: company can recover profits made by the director if in breach

Abuse of Corporate Opportunities Cook v Deeks (1916) 1 AC 554 Privy Council held: Directors were in breach of duty and had to account any benefits from the new contract. The majority cannot make a present (the new contract) to themselves at the expense of the minority. ie, this would have amounted to the majority giving property which ...