Corps reading 9 - the 9 week lect PDF

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WEEK 9 No profit rule (a duty to account for benefits gained): Prevents a director from taking ‘any secret remuneration or any financial benefit unauthorised by the law, or by his contract, or by the trust deed under which he acts, as the case may be.1 A director, officer or senior company employee may not secretly profit from their position within the company.

No conflict rule (a duty of loyalty): No conflict rule is designed to prevent a director ‘entering into engagements in which they have (or can have) personal interests conflicting (or possibly may conflict) with the interests of those whom they are bound to protect. A director, officer or senior company employee must not permit themselves to be placed in a position where their duty to the company is in conflict with a duty to any other (a conflict of duty and duty), or with their own interests (a conflict of duty and interests).

Who owes fiduciary obligations? The director, promotor, agent, officer or senior employee owe fiduciary obligations. Who is the beneficiary of the fiduciary obligation? A director may also owe a fiduciary obligation to a beneficiary other than the company. 1. when a director purchases shares from members 2. when a company is about to be wound up 3. in a close-held company

1. when a director purchases shares from members Brunninghausen v Glavanics Fact

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Dale v Inland Revenue Commissioners [1954] AC 11.

B and G have a joint importing company. G agrees to sell his shares to B. A potential purchaser made an offer which would significantly increase the value of G’s shares. G’s shares sell in haste, and G was deprived of the increased value of his share in light of the offer. Bryson J Held He found the director B owed a fiduciary obligation to the shareholder G because - the B’s conduct that fell outside the ‘range of honest dealing according to ordinary community standards’ and - G was dependent on B for advice and information concerning the negotiations.2

2. when a company is about to be wound up Mesenberg v Cord Industrial Recruiters Rty Ltd Young J held In a two-person company is about to be wound up, the director owed a fiduciary duty - to the company and - to the other quasi-partner.3 3. in a close-held company Bryson J held 1. the director owed a fiduciary obligation to the shareholder on the basis of the limited shareholding in that company. 2. the relationship in a large company are ‘impersonal’ which prevents the attachment of fiduciary obligations.4 Young J held A fiduciary obligation will be owed - Where one shareholder undertakes to act on behalf of another shareholder - Where one shareholder is in a position to have special knowledge and knows that another shareholder is relying on her to use that knowledge for the advantage of another shareholder as well as herself, and - Where the company is in reality a partnership, now called ‘quasi partnership’. 5

In modern commercial context

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Brunninghausen v Glavanics (1996) 19 ACSR 204. Mesenberg v Cord Industrial Recruiters Rty Ltd (1996) 39 NSWLR 128. 4 Brunninghausen v Glavanics (1996) 19 ACSR 204. 5 Crawley v Short (2009) 262 ALR 654.

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A director who does not wish to breach their fiduciary obligation must make full disclosure to the members, as to the conflicts or profits arising in the course of the relationship.

Issues: 1. whether a director can take up a corporate or business opportunity. 2. If they do, who should provide fully informed consent to absolve the director of a breach. 3. whether directors can hold multiple directorships, and whether directors can have an interest in or transact with the company.

Can directors take up corporate opportunities? Whether directors are permitted to pursue an opportunity which the company has declared it will not pursue, or is unable to pursue. 1. Industrial Development Consultants Ltd v Cooley (no any consent) Fact IDC was rejected by a project to distribute gas. However, Cooley as a director got the project personally. He accepted that offer and made a false excuse to release from his position as a director. IDC found he was personally undertaking that project and then sued him. Roskill J held Regardless of whether the Cooley undertook that project personally, Cooley was duty-bound to pass the opportunity to IDC. 6 IDC made the contract with and appointed Cooley as the director to gain that project for the company, so Cooley was liable to account for the profits he had obtained personally from the contract. 7 The policy that precluded the IDC from the project did not ameliorate Cooley’s breach in personally undertaking the opportunity which had arisen from his position as a fiduciary.8 2. Regal (Hastings) Ltd v Gulliver (no conflict opportunity between the two groups of directors) Fact The company Regal owned a cinema in Hastings. Regal wishes to lease two more cinemas in order to make a more attractive package for sell. They provided share capital of $5000 of its subsidiary in exchange of the two more lands for cinemas. As a

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Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. 8 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443.

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result, Regal was sold in a good price. But the new owners of Regal found this and used the former directors of Regal as they had personally profited from their investment in the subsidiary. Held The director was held to account for the profit they had personally received on the shares, except for the chairman who did not make personal profit from it. Distinction with Cooley Although Regal was the plaintiff, it is actually the latter directors of Regal to sue the former directors of Regal, and Regal was at all times the beneficiary of the duty. Compared to Cooley, the directors acted bona fide at all times and the opportunity was not in conflict between the former and the latter directors.

3. Queensland Mines Ltd v Hudson (have fully informed consent) Fact Hudson negotiated with Tasmania government on behalf of the Queensland Mines Ltd, but licenses were issued in his personal name. When the Queensland Mines Ltd faced financial problems unable to perform the obligation, Hudson resigned and then informed the Tasmania government that he can personally bear the obligations under the licenses. Privy Council found Hudson had been left on his own, for better or for worse, with the Tasmanian license. He was not obliged to account. Distinctions with Regal Regal: Ex-directors can obtain the profit from its subsidiary’s shares because of their position as the directors of the parent company. Thus, they are liable. Queensland Mines: Due to liquidity problems, the company was unable to pursue the opportunity. Hudson resigned, and with disclosure of the full knowledge of the company board, successfully pursued the opportunity. Held Once the company had rejected the opportunity, there was no conflict of interest between the director and the company. After the board meeting where the opportunity rejected, the company was - either ‘outside of the scope of the trust and outside the scope of the agency’ between the directors and the company, or - proceeded on with the fully informed consent of the company.9

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Queensland Mines Ltd v Hudson (1978) 18 ALR 1.

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2. who can provide fully informed consent? 1. Queensland Mines Ltd v Hudson In this case, the board of meeting was actually controlled by Hudson and two other directors. the consent of the board of directors can be considered as equivalent to the consent of shareholders. The shareholders are [the other two directors], both of whom were represented on the board of directors. By the board granting consent in board meeting, the shareholders had in effect granted their fully informed consent. Once the board of directors can consent, the consent of shareholders in general meeting is unnecessary.10 2. Furs Ltd v Tomkies Directors can only make effective disclosure to and obtain consent from the company in general meeting.11

3. Multiple directorships and directors with interests in and transacting with the company A director cannot hold a position on a board of a competitor, or personally compete with the company.12 This principle has been relaxed by the London and Mashonaland rules:13 A non-executive director can be a director of two competing companies, as long as there is no direct conflict, such as: - Through the divulging of confidential information, - An appointment is prohibited by express terms of the constitution, or - Express or implied terms of any other agreement.14 However, in practice, a director appointed by two companies seems to be impossible to maintain fiduciary duties.15 Especially for a nominee director, who is appointed by a special interest group.

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Queensland Mines Ltd v Hudson (1978) 18 ALR 1. Furs Ltd v Tomkies (1936) 54 CLR 583. 12 Averdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461. 13 London and Mashonaland Exploration Company Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165. 14 London and Mashonaland Exploration Company Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165. 15 Fitzsimmons v The Queen (1997) 23 ACSR 355. 11

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s 182 and 183 deal with an element of the fiduciary obligation owed by directors to the company in equity — ‘no profit’ rule, which can be divided into: - Improper use of position, and - Improper use of information. s 191 contains ‘no conflict’ rule.

2. S 182 USE OF POSITION — CIVIL OBLIGATIONS A. Source 182 Use of position—civil obligations Use of position —directors, other officers and employees (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. Note:

This subsection is a civil penalty provision (see section 1317E).

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection. Note 1: Note 2:

Section 79 defines involved. (Involvement in contraventions) This subsection is a civil penalty provision (see section 1317E).

B. cases R v Byrnes (1995) 183 CLR 501 R v Chew (1992) 173 CLR 626

3. S 183 USE OF INFORMATION — CIVIL OBLIGATIONS 183 Use of information—civil obligations Use of information —directors, other officers and employees

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(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. Note 1: This duty continues after the person stops being an officer or employee of the corporation. Note 2: This subsection is a civil penalty provision (see section 1317E). (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. Note 1: Note 2:

Section 79 defines involved. This subsection is a civil penalty provision (see section 1317E).

79 Involvement in contraventions A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention. *** a person who is involved in a contravention according to s 79

1. Chew v The Queen Seeking to gain a benefit for themselves or another is sufficient to breach the provision, whether or not that advantage is actually gained or the detriment caused. The requirement of ‘improper’ is objective. ‘standard of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and circumstances of the case’.16

It is common to see a breach of ss 182 and 183 alongside a breach of ss 180 and 181. HIH Insurance Fact Adler was found to have improper used his position as a director in HIH and PPE and officer of HIH C and information obtained in these positions to gain an advantage personally.

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R v Byrnes (1995) 183 CLR 501.

Williams, the director and CEO of HIH and director of HIH, was found to improperly use his position to gain an advantage for Adler, and cause detriment to HIH, PPE and HIHC. Adler and Williams were found to be in breach of s 180(1), and Adler also breach of s 181(1).

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