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Lecture 6 DIRECTORS DUTIES AND CORPORATE GOVERNANCE Directors are obligated to comply with:General Law (common law duties

s and fiduciary duties) Company constitution (This also includes replaceable rules) Corporations Act

Fiduciary Duties Fiduciary duties imply that directors must:S181: act in good faith in the best interests of the company (to act in good faith means that directors must act in the interests of the general body of shareholders. Also means they have to act fairly across all classes of shareholders) S181: exercise their powers for proper purposes (directors powers should not be used to confer an advantage on themselves or on anyone else. Eg. This is breached when a director issues shares in attempt to prevent a takeover or to alter the balance of power among shareholders) retain their discretionary powers (discretionary powers means the power to make decisions on behalf of the company) avoid conflicts of interest

SECTION 181 (to do with good faith) A director must exercise their powers and discharge their duties in GOOD FAITH in the BEST INTERESTS of the COMPANY and for PROPER PURPOSE. ** Important Case!

ASIC v Alder [2002] NSWSC 171 Adler is a director of HIH and he arranges for
a subsidiary of HIH to award a loan to Pacific Eagle Equity (another company that he manages). It is ruled that ADLER HAS BREACHED s181 AS HE HAS NOT ACTED IN THE BEST INTERESTS OF HIH. SECTION 182 (to do with use of position)

A director, secretary, officer or employee of a company must not improperly use their position to GAIN ADVANTAGE FOR THEMSELVES or CAUSE DETRIMENT TO THE CORPORATION. In other words, a director is not allowed to use their positions to gain advantage.

** Important Case!

Furs Ltd v Tomkies (1936) 54 CLR 583 Director of Furs Ltd sells private
confidential information to the purchaser firm when Furs is put up for sale. This was a breach of duty to avoid conflict of interest.

ASIC v Adler [2002] NSWSC 171

SECTION 183 (to do with use of information) A person who gets information because he is/has been a director/officer/employee of a company must not IMPROPERLY USE the information to GAIN ADVANTAGE FOR THEMSELVES or CAUSE DETRIMENT TO THE COMPANY.

Grove v Flavel (1986) 4 ACLC 654 A director rearranges group structure as to

disassociate itself from the failing company. This is a breach of s 183 because the director has used the information gained from his position as director. Sometimes a director may avoid a breach of duty. For example:

Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 A company claims that
their director has breached conflicts of interest duty by acquiring certain licenses and profiting from them. However it turns out, that the company was in poor financial position and was not able to take on the opportunity for itself. The managing director fully disclosed the transaction to the board (sometimes u also have to disclose information to the shareholders) and bore al elated expenses. Court ruled there was NO BREACH OF DUTY. SECTION 184 (How to tell if a breach has been made) A director has committed an offence is they are reckless or intentionally dishonest and if they fail to exercise their powers for good purpose in the

best interest of the company. Basically, s 184 says that if a director has misused their position/information obtained from their position (aka breached s181, s182, s183) they have committed an offence. If s 184 has been breached, there is a maximum penalty of a fine of $220,000 and/or imprisonment for 5 years

SECTION 180 (Duty of Care and Diligence) **This has got to do with a directors skills and knowledge of the company. A director must exercise his power and discharge his duties with the DEGREE OF CARE AND DILIGENCE that a REASONABLE PERSON would if they were a director in that companys circumstance and if they held that position and had the responsibilities of a director in the company. (aka a director should act as a normal person in that position is expected to act) Business Judgement Rule: Business decisions have to be MADE IN GOOD FAITH. Directors should NOT HAVE ANY PERSONAL INTERESTS and should INFORM THEMSELVES TO A APPROPRIATE LEVEL and RATIONALLY BELIEVE THAT THEIR JUDGEMENT IS THE BEST FOR COMPANY. (these are the criteria in order to fulfil s180) ** Important Cases!

ASIC v Adler [2002] NSWSC 171 Daniels v Anderson (1995) 13 ACLC 614 AWA is a large company that invests
in foreign exchange. One of their managers makes a bad investment and hides the large loss from upper management. This is not detected by AWAs auditors. AWA sues their auditors for negligence and the auditors fight back claiming that it is the fault of directors negligence at fault. The court held that although auditors were negligent, the directors of AWA should have complied with s180 and should take appropriate measures to keep up to date with the companys progress (ie attend meetings, know financial position etc) Duty to act in good faith

Directors have a duty to act in good faith of the company but NOT to individual shareholders.

Percival v Wright 2 Ch 421 A shareholder goes up to a director and tries to sell

his shares to him. The director buys them without disclosing that the company is just about to be taken over at a substantially higher price. When the shareholder finds out, he sues claiming that he director has breached his fiduciary duty. The Court disregarded this because DIRECTORS ONLY OWE FIDUCIARY DUTIES TO THE COMPANY AS A WHOLE AND NOT TO INDIVIDUAL SHAREHOLDERS. In special circumstances, the director does owe fiduciary duties to an individual shareholder. For this to happen, the director must have been in direct and close contact with the individual member so that the director caused the member to act in a certain way.

Coleman v Myers [1977] 2 NZLR 225 The director of a family company

arranged for the company to be taken over at under-value by a new company which was managed by him. It was held that the director breached fiduciary duties to the minority members of the family company because he failed to disclose material information about his future profits and the companys true asset value.

Brunninghausen v Glavanics (1999) 17 ACLC 1247- There are two shareholders

which are also directors of this company. Glavanics who is not actively involved in the companys management and has no access to financial records, is convinced by Brunninghausen to sell his shares. As he has done so, he finds out that Brunninghausen has actually been offered to sell all the shares of the company at a higher price. Glavanics sued for breach of fiduciary duty which the court ruled that Brunninghausen possessed special knowledge acquired while managing the company which provided an opportunity to sell the companys business advantageously.

Hurley v BGH Nominees Pty Ltd (no 2) (1984) 2 ACLC 497 Court ruled that it
was incorrect to say that directors of a company are entitled in all circumstances to act as though they own no duty to individual shareholders. In

appropriate circumstances, directors of companies that act as trustees owe duties not only to individual shareholders but to the beneficiaries of the trusts. Duty to exercise power for proper purpose:

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Two major
shareholders have 55% of shares between them and decide to make a takeover bid for the company. The company issues new shares to a new buyer as to reduce their majority interest to that of a minority. ALTHOUGH IT IS WITHIN DIRECTORS POWER TO ISSUE SHARES, USING SUCH POWER LIKE THIS IS A BREACH OF FIDUCIARY DUTY. Duty to avoid conflict of interest:

Cook v Deeks [1916] 1 AC 554 Toronto Construction Co has 4 main

shareholders and they are contracted to so some project. There is a falling out between Cook and the other three directors so the three form another company, Dominion, to undertake the project. The plant is sold to Dominion and previous clients of Toronto Construction Co move over. THIS IS A BREACH OF AVOIDANCE OF CONFLICT OF INTERESTS AND THE EXERCISE F POWERS IMPROPERLY.

SECTION 588G (Insolvent Trading) Insolvency occurs when a company is unable to pay off its debts. When there is reasonable doubts to suspect this, a director is NOT ALLOWED to incur more debt. If a director continues to incur more debt, he has breached s 588G and will have to face ASIC. ASIC may get him to pay a fine of maximum $200,000 (under s1317G) or disqualify him completely (under s206C) or get him to pay the company compensation (s1317H).

EXONERATION (when directors are excused from their breach)

- Directors may be exonerated (ie excused from liability) is shareholders pass an ordinary resolution to ratify (to accept) their actions. However this cannot be done if the director in question is also the majority shareholder of the company. This also cannot be done if the company is insolvent or near insolvency because directors have thus failed to take the interests of creditors into consideration.