Corp Law Week 9 Tuesday

Three subsidiary conflict of duty issues

 Duty not to fetter discretion

 Position of nominee directors
 Position of a person who serves as director of competing companies (director of 2 or more
companies)

See handout for flowchart

Start with duty not to fetter discretion

If D has entered into arrangement where they have fettered their ability to exercise discretion for
company, they have set up conflict b/w duty to act in BI of company and to discharge their
obligations under arrangement

Not much law on how it works

Lord Denning quote from Boulting v Association of Cineamtograph. He says examples, 3 that,

 D cannot:
o Bind himself to disregard those duties or to bind himself to act inconsistently with
them
o Agree to carry out his duties in accordance with instructions of another rather than
on his own conscientious judgment
o Agree to subordinate interests of those whom he must protect to the interests of
someone else
 these are example where D will contravene this duty

how about situation where company owns land, agrees to lease land to someone, and there is term
which gives lessee right to renew lease for another period? hasn’t this fettered board’s discretion to
consider lease and terms of continued lease? Thorby says this is actually fine!

Thorby v Goldberg

 HC judgment
 Various transactions exist where exercise of D’s discretion is at time of contracting
o So the time when D needs to make sure discretion not fettered is at time of entering
into lease – the D does not need to preserve this discretion during time of K
o intitial assessment must be that entering into K must be in best interests of company
 D can then enter into K and accept terms in which performance of K might fetter
their discretion, that is fine (this is really how companies enter into long-term K’s)
 As long as discretion properly exercised at point of entry into K

This duty does not arise much –must find extreme examples from the denning quote

Position of nominee directors

nominee director is D who has been appointed by major SH

E.g. when activist investor makes investment and gets a seat on board

may be situation where this nominee director has to serve interests of the company as well as the
interests of his/her appointer (e.g. the major shareholder they are also a D or member of). Law says:
The fact nominee director has been appointed does not mean they can disregard interests of
company. all the rules we have covered apply. Nominee needs to be careful they are compliant,
must be alert to conflicts (comply with attenuating provisisons of constitution, disclose interests, etc)

Appointer may make investment and nominate a director to go on the board of the invested
company (this would be the nominee director)

Appointer has seen a benefit for itself, so nominee director might serve two interests: Interests of
his other appointer + interests of company

may give rise to indirect interest/conflict

e.g. D has duty to Virgin and duty to Air NZ

In these instances for nominee directors, may of the rules and stuff we have covered may be
relevant

 conflict rules apply

 secret profits could apply (also think of s 182)
 s 183 may be relevant - duty not to misuse information or position (e.g. D cannot use Virgin
information for Air NZ’s benefit)

if overlap b/w interests of company and interests of appointer, then D can permissibly follow
interests of appointer if interest is identical to interest of the company they are serving as D

Leven v Clark

 Suggests more permissive approach – suggests nominee D can just follow exclusive interest
of appointer and not even have to say these interests are same as company
o this is too broad an interpretation though. court formed this view based on
circumstances of case, i.e. there were attenuating provisions of the constitution. in
reality, nominee director would need to be satisfied acting in best interests of
company that are nominee D of

See attenuating provisions of constitution

we discussed corporate groups – in a way, D of subsidiary in corporate group is just another example
of a nominee director. so if corporate group situation, deal with it how we did with content from
previous lectures. but if dealing with situation like the Virgin one above, deal with this content just
discussed

Position of a person who serves as director of competing companies

Law says mere fact D serving on two competing companies is not a problem, MUST SHOW
something more, i.e. that they are misusing info, misappropriating opportunities, solely pursuing
interest of one company: London v Mashoner Land Exploration 1891 WN 165

Doesn’t come up much in practice because most BOD would not allow a D of competing company to
sit on their board in the first place
Now look at duty of care, skill and diligence

Focus on:

 Historical context
 Sources of duty
 Scope of duty (including standard it establishes)
 Delegation to, and reliance no, others (if subordinates make a stuff up)
 Business judgment rule

the duty is in fact really a duty of care, skill and diligence but DOC may be used as shorthand to avoid
repetition

Historical context

 Re City Equitable Fire (in this case, court had to consider whether D’s had complied with duty
of CSD)
o Skill: director need not exhibit in performing their duties a greater degree of skill
than may reasonably be expected from a person of his knowledge/experience
 Subjective test – if they are stupid person, what can we reasonably expect of
stupid person??
o Diligence: D not bound to give continuous attention to affairs of company. D is not
bound to attend all such meetings, though he ought to attend, whenever in
circumstances he is reasonably able to do so
o Delegation/reliance: w.r.t. all duties that may properly be left to some other official,
D is in the absence of grounds for suspicion, justified in trusting that official to
perform such duties honestly
 No monitoring role unless actual suspicion. if nothing that gives rise to
actual suspicion, fine
 Standard was set so low (various reasons duty was not set so strictly)
 Cwlth Bank v Friedrich
o Court acknowledged that complexity of commerce has intensified and court started
to move away from position in Re City Equitable case
 in relation to common standard, court has really changed w.r.t this

Source of duty – this duty arises from various sources

 Equity
o Original sourced from this – equitable duty of care
 Common law (negligence)
o Duty of care also arose in CL principles of negligence
o E.g. tortious duty of care for D
 Contract/labour law (NOTE: really only for executive directors who have K of employment)
o K of employment – normally has express term of the standard they must comply
with
o Under labour law, there will be implied standard of care (implied term)
o K is important source of duty – normally sets robust standard
o However, if dealing with someone who is not an employee, contract will not be
relevant source and you will be looking at CL, equity and statutory duty
  Statute: s 180(1), corporations act
o Statutory duty has been established
o Covers both D and officers
 Defined in s 9
 Wide definition
 Director definition included: de facto D’s
 Officers definition included: Insolvency officials, de facto officers
o So because of broader definitions, this statutory duty can apply to someone who
may not be liable under common law or equity
o OBJECTIVE duty but also contextual
 objective is in first part - degree of care and diligence that a reasonable
person would exercise
 but contextual in the sense you have to have regard to company
circumstances
 Consider type of company, size/nature of its business, composition
of board, allocation of duties, whether listed or not, subsidiary
business: ASIC v Rich 2009
o second bullet point
o what does responsibilities mean?
 asic v rich 2003 and 2009 - Austin said responsibilities not limited to those
imposed by statute or formal delegation (by constitution or board
resolution), includes also those arising just by how the company works and
operates. it can also be influenced by skills D brings to the board
 so the person’s skills and experiences may contribute to the responsibility
 so NOT JUST formal responsibilities
o See 37.5min-39.20 sec
o third line - ‘degree of care and diligence’ but doesn’t skill
 Courts have said this DOES import notion of skill: Vines v Asic 2007 and ASIC
v Rich 2009
o Can allow for banning orders

Implications of diferent sources of duty

 These different sources operate CONCURRENTLY

 When do you need to focus on different sources?
o When you are dealing with person who is not an employed executive:
 you look at just: equitable, tortious and stat duties are relevant
 Courts have held they have same content, so generally not necessary to
distinguish b/w them unless you need to address the issue in last bullet
point below
 so set source aside in your problem question, unless it affects issues of
remedies (see later). just say ‘contractual source not relevant’  then
proceed into general discussion.
o When you are dealing with an employed executive:
 in this case, the contractual duty is generally primarily relevant
 hopefully, there will be express term establishing standard of care. but even
if not, there is normaly implied term under labour law
  The equitable, tortious and statutory duties can/are also likely to apply –
courts have held they have the same content, so generally not necessary to
distinguish b/w them unless you need to address the issue in last bullet
point below
o When there is a need to focus on the particular remedies or consequences flowing
from a breach (which can differ depending on the source of the duty)
 because of different sources, need to think about remedies as well – these remedies can
differ by source
o E.g. tortious duty can open up contribution claims (contribution legislation) when
assessing damages that are different to equity remedy
o s 180 has civil penalty regime – so this can make stauttoyr duty more important
o Transaction is not voidable (as compared to breach of duties discussed previously)
o No criminal consequences under Australian law for breach of duty of CSD
o cases before about breaches of director duties had remedy as being transaction is
voidable, for breach of duty of care, this voidability is NOT A REMEDY for CL breach

Standard of C, D and S required by the duty:

 Standard of care and diligence

o Minimum requirement that D’s be informed, engage in monitoring, bring an
independent judgment to matters before them, diligently attent to board business
 Standard of skill
o Minimum requirement of financial competency
 Are the standards variable?
o Answer: they can go up but they cannot be reduced below the min requirements
noted above
 How does duty operate when D or officer exposes company to harm/contravention of the
law?

Austin’s judgment in ASIC v Rich is CLEAR – must read. good discussion of duty.

Standard of care and diligence

Days of gentleman D (discussed in history above) are over- must be monitoring

ASIC v Rich 2009; ASIC v Healy; taken together, cases say

 D should become familiar with fundamentals of company business and keep informed about
company’s activities
 D must take reasonable steps to guide and monitor position of company
 Must be regular attendance at board meetings
 Maintain familiarity with company’s financial position

CBA v Friedrich

 this case says D’s must bring informed and independent judgment on issues

Daniels v Anderson
  Amount of board meetings should depend on what duty requires – you meet as directors as
many times as required
 Ignorance and failure are not an excuse

D generally expected to attend all meetings unless exceptional circumstances such as illness: Virsakis
v ASC 1993

ASIC v Healy

 A lot of reading and complex information is not an excuse for not fullfiling this duty

All imply a switched on, committed, critical D

lecture break…

D’s must be financially literate – court won’t cut you slack if you can’t understand basic accounting
concepts or financial statements

These standards can VARY UPWARDS but they will not go below the minimum specified above.

we then saw how duty is contextual: Contextual features can allow you to bring them into standard
of care and INCREASE THE STANDARD: Austin J in ASIC v Rich. so standards can very upwards but will
not fall below minimum.

ASIC focuses on statutory duty of care – they would say need to look at D’s position and
responsibilities – e.g. suppose D is CFO – position of CFO is recognised position, special skills
attached to it include …(call evidence to show special skills), then compare this standard with the
conduct of the D in question. this is what happened in ASIC v Vines

ASIC v Rich 2003 judgment

 Chairman applied to have proceedings struck out

 Austin found ASIC had reasonably arguable case that chairman had higher standard
o Rich was chair of various committees, he was experienced – for this, ASIC’s case that
he had heightened standard because he was chairman was arguable
 this case does show you can go beyond standard for someone like a chairman –
responsibilities increased
o Standard can never be sent be low minimum, regardless of features
o contextual circumstances can increase standard as case was here

Suppose someone brought on board because they have special skills

 Outside their expertise, such a person is still subject to standards, however they will be
subject to minimum standard
 W.r.t. their area of expertise, they will generally be subject to a higher standard

consider situation where D has been part of decision which has exposed company to harm (common
fact scenario). court has held that mere fact of involving company to operations subject to harm is
not of itself a breach (every company has risk): ASIC v Rich (Austin). So this does nto create prima
facie breach  the question becomes: Apply Wyong – what was magnitude and probability of risk
veresus countervailing beenfits and steps that could have been taken to mitigate? And what were
countervailing benefits? How risks mitigated?  Decide whether breach of duty based on this test.
There is NO GENERAL OBLIGATION to avoid harm to company (business inherently have risks)
how about situation where company is at risk of penalties if contravention of the law. e.g. aggressive
tax structuring. you need to apply Wyong as above – do analysis.think about wyong, beenfits, risks
taken. if benefits are massive, board may say they will push the envelope on this one. if this ends up
breaching tax law, breach of tax law does not in itself mean breach of duty – need to go back to look
at Wyong calculus (above) and see whether envelope has been pushed too far so as to amount to
breach

 There have been cases where duty has been pushed too far
 When risk of contravention is clear and countervailing benefits are insignificant = most likely
breach.

Delegation

S 198D – broad power of delegation

S 190 – director’s responsibility for delegation

D’s inherently have to delegate to management of company but if management teams doesn’t
exercise their acts correctly or give inaccurate information, this has implications on our analysis

so D’s ability to discharge their DOC will be linked to competency of management – if management
stuff up and don’t exercise delegated power properly, board of directors is potentially exposed. so in
this case, to what extent can board plead mitigation that they were relying on management to
complete task?

What does law say?

S 198D gives board broad powers of delegation

S 190 – says when D is accountable when delegated power is not exercised properly

S 190

 Starting proposition: director is responsible for delegated power (s 190(1))

 THEN responsibility removed only if they come w/n requirements of s 190(2)
o A)
 All times
 Board needs to be actively monitoring
o Reasonableness is key concept
 objective assessment - see s 2(a) and ‘at all times’, which suggests belief
must be maintained on ongoing basis
 ASIC v Adler sets out considerations for whether this reasonableness is
satisfied – see case, set out there
 Whether function is one that can properly be delegated
 Extent D put on inquiry or should have been put on inquiry
 Risk involved in and nature of transaction
 was relationship b/w D and delegate one which D honestly believes
delegate is competent and trustworthy
 Extent steps taken by director, e.g. inquiries made or other
circumstances engendering trust
  Where a transaction involves potential for conflict of interest, a
special vigilance is required, calling for scrupulous concern that
approvals are obtained and safeguards put in place

clearly there will be some situations where board just cannot maintain effective delegation – few
examples

James Hardie

 Concerned misleading announcement (said exposure is fully funded but this was
unwarranted). hardie sought to separate subsidiaires of group that were cuasing the holding
company grief and impacting share price, wanted to get rid of them by hiding them off in
foundation. hardie announced split and said foundation is fully funded so it could meet all
claims (asbestos liabilities) of subsidiaries being transferred to foundation.
 it was hard for anyone to say with any certainty what claim exposure would be, yet board
still said foundation was ‘fully funded’
o BOD said lawyers and actuaries involved and they had given advice it was fine –
court said announcement of this significance on such a sensitive issue, BOD could
not leave final assessment to others, BOD needed to turn their minds to it

Permanent Building Society

 Very risky transaction – CEO’s input required

 Building society – transaction involved acquiring land for property development – very risky
(zoning issues) – judge said manifest it was capable of causing serious harm
 judge held heavy duty on directors in general and MD in particular to scrutinise this
transaction
 in this case, MD had conflict (indirect interest) in transaction so he had excused himself from
transaction voting.
o judge said MD should have ensured other D’s understood nature of transaction and
steps that might need to be taken to address risks of tranasction
 key point: unususal transaction which had potential to expose company to real harm, the
CEO/MD needed to do more (couldn’t just walk out and leave it to other D’s to
manage/decide)

Non-delegable matters – two categories

1. Decisions regarding particularly serious matters involving company

o Morley v AIC – approval of very significant/sensitive ASX announcement
o Permanent v wheeler – consideration of unusual and risky transaction required ceo’s
input
2. Decisions which the law requires D to make
o ASIC v Healy – directors sign-off on financial statements

ASIC v Healy (centro decision)

 Centro had misstated liabilities – muddled what the current and non-current liabilities were
 Centro said they had sign-offs from management and PWC , what more could they do?
 Court looked at relevant act (s 295 for financial position disclosure), understood the
responsibility it sets out and concluded:
 o relevant section required d’s to give opinion - in order to form opinion, directors
must actually turn their mind to financial statements and apply basic financial
literacy
o D’s here could have picked up issue but they just never looked at/assessed it
themselves – they just said ‘yeah, PWC has signed it off, done.’
o D’s cannot delegate this assessment, assessment must be the D’s because the act
requires their consideration
 Final sign-off cannot be delegated

S 189

 Mere fact relying on info from management doesn’t set D off hook – there must be
reasonableness about reliance on this information
 e.g. confidence in person who has given info. also, independent assessment made
 Requirements
o If satisfied, D’s reliance is reasonable and D can argue this in mitigation

We now turn to business judgment rule (BJR):

Two sources: General law and statute

Common law business judgment rule

requires court to distngisun between meer errors of judgment and negligence. General rule is
negligence actionable but error of judgment not: Austin J . This is initial filter applied when working
out whether D breached DOC. when assessing commercial decisions, D’s should not be penalised for
mere error of judgment (e.g. buying shares day before the price goes down)

so first have CL BJR  Then we have statutory business judgment rule – s 180(2)

 See discussion in ASIC v Rich (2009)

 What is onus of proof: onus is on defendant director
o Must prove it was a business judgment first
 If board was oblivious to something and didn’t make judgment at all, there is
no business judgment
o Then must prove elements in (a)-(d)
 Reasonableness comes in – objective test here
o Competing intentions of board, information on hand – relevant to whether D’s belief
 D)
o Reasoning process warranting decision was rational
o As long as arguable chain of reason, that is enough

if made judgment in good faith and rationally believe it is in best interests of corporation – Austin
goes through onus of rppof in Rich 2009. he said onus is on defendant. defendant needs to first
prove there was business judgemnt and then the elements.

business judgment

 s 180(3) – give sdefinition - means any decision to take or not take action in respect of a
matter relevant to the business operations of the corporation.
  incudes decision to enter transaction, budgeting, forecasting, planning, decisijons about
personell, set of policy goals, dividing responsibilities in company- Austin in Rich says all
within this BJ definition
o he said it would NOT include judgment in connection with D’s oversight/monitoring
role
 explanatory memorandum

requirement to inform yourself – reasonableness comes in. objective test. determined wr.t. time to
gather information

s 180(2)

Austin said what d) requires is D’s belief needs to be supported by reasonable process – if D turns
their mind to it and comes up with something, this will be enough

this concludes Austin’s discussion of key requirements of BJR

NOTE BJR is not a presumption, there are actually requirements that need to be proved

however, when information leading up to decision is fraud or rushed, BJR not satisfied because c)
element not satisfied

this concludes DOC