BSL201 Finance Law Workshop Questions Chapter 4

Question One

What is corporate governance and why is it so important?

Corporate governance is a method by which companies are controlled and managed.

This is important to help companies achieve “best practice” with the intention of being economic
efficiency and investor protection.
It ensures that the controllers of companies make decisions which benefits the company and not
engage in activities which would be detrimental to the company that leads to indirect investment
loss by investors and consequential reduction in value of their investment.

Question Two

The Haynes Final Report focused on aspects of CG. Discuss briefly.

Question Three

Answer the following about directors’ duties:

a) What does it mean to act with care and diligence

Directors are to make decisions in their capacities on behalf of corporate and must act in the
same manner as a reasonably prudent person
Director is careful and not reckless in action that he takes – S180(1) CA
S180(2) CA – Business judgement rules – What is expected from Directors that he should be
acting – Use subsection (a) to (d) to determine if director is acting with care and diligence

b) What does good faith mean? (you may need to research this and also look at case of Chew v
R).
Directors are to make decisions in their capacities on behalf of corporate with a conscious
regard for their responsibilities as fiduciaries and not on personal interest.
S181 CA

c) What does “acting in best interests” mean?

Directors are to act for the benefit of the members/shareholders of the company as a whole
and where there are competing interest, directors need to balance it out fairly to prevent
conflict of interest.
Question Four

For each of the situations below, separately describe the directors’ duties that are relevant to each
set of facts and any breaches that may have occurred. As authorities to support your answers,
include references to sections of the Corporations Act.

(a) Construction Ltd builds houses. The directors of Construction Ltd have registered their own
home building company and have been diverting Construction Ltd customers over to their
own company. What if the company was Construction Pty Ltd?
S124?

(b) Expansion Ltd required additional capital and the company had decided to borrow funds
from its bank instead of issuing shares. However, an opportunity arose whereby the
required capital could be raised by issuing shares to an investor who agreed not to sell the
shares should a takeover bid ever be made for the company. The directors considered that
even though the shares would be issued at a discount it was a better arrangement than
borrowing funds.
[You are not required to consider any takeover laws in your answer.]
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(c) Fred, an investment expert, has a horse running in the Melbourne Cup which has taken up
all of his attention. Due to this distraction, Fred fails as a director of Hi-risk Ltd to properly
read his directors’ documents. As a result an investment is made which results in a
significant loss to Hi-risk Ltd.