Professional Documents
Culture Documents
SEMINAR 7 (A):
DIRECTOR AND DIRECTOR’S DUTIES II
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Directors’ duties
• The need: the (what economists call as) agency
problem
• How to regulate
• Quality control
• Duty of care (general law and CO s 465)
• Integrity control
• Duties super-imposed by Equity: fiduciary duties
• Statutory rules (e.g. CO Part 11)
• Non-statutory guidelines (e.g. Guide on Directors’
Duties)
Fiduciary Duties
• Fiduciary Duties
• Duty to act bona fide (in good faith) in the
interests of the company
• Duty to exercise powers for proper purposes
• Duty to avoid conflict of interests
Fiduciary Duties
• Fiduciary Duties
• Duty to act bona fide (in good faith) in the
interests of the company
• Duty to exercise powers for proper purposes
• Duty to avoid conflict of interests
Proper Use of Directors’ Powers
• The directors are not required to make the best
possible decisions, but the powers of directors
are limited insofar as
• 1) they are made in good faith for the benefit of
the company (subjective and a question of fact)
and;
• 2) they have been exercised for a proper
purpose (objective test determined by looking
at the primary purpose v. proper purpose of
power)
Duty to act bona fide in the interests of the company
In re Smith and Fawcett Ltd (1942)
J Fawcett N Smith
(d. 26/2/1940)
4001 shares
4001 shares
Art 10: The directors may at any
Co time in their absolute and
uncontrolled discretion refuse to
register any transfer of shares …
M LTD
Consequences of issuance H
of shares to H: $$$
1. M Ltd had capital
2. A+B 55%-> 36.6%
3. H positioned to takeover co
Duty to exercise powers for proper purposes
Howard Smith v Ampol Petroleum Ltd [1974] AC 821
Facts:
• A made an offer for all the issued shares of M, and
another company, H, announced an intention to make a
higher offer for those shares. M's directors considered
A's offer too low and decided to allot shares to H.
• The effect of that issue was that
• M had much needed capital;
• A and B's shareholding was reduced to 36.6 percent,
of the issued shares and
• H was in a position to make an effective takeover
offer.
• A challenged the validity of the issue of the shares to H.
Duty to exercise powers for proper purposes
Howard Smith v Ampol Petroleum Ltd [1974] AC 821
Application
• Identify the power used by directors
• Allotting shares
• Identify the proper purpose for which that power was
delegated to the board of directors
• Raising capital
• Identify the substantial purpose for which the power was
in fact used
• Destroying an existing majority or creating a new majority
• Decide whether that purpose is proper
• No.
Duty to exercise powers for proper purposes
Hogg v Cramphorn Ltd [1966] 3 All ER 420
Profit Rule
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
£
4 Regal A 3rd
4 other Regal
directors party
persons (R Co)
& SH buyer
Shares in R & subsidiary
Facts:
• The subsidiary (Amalgamated) incorporated to hold two cinema
leases to be taken up and on sold to another person along with
a cinema owned by the holding co (Regal).
• Landlord was concerned that Amalgamated was under-
capitalized and required that either the directors of Regal
provide personal guarantees or the capital of Amalgamated
(£5000) be taken up and fully paid up.
• The Regal directors refused to provide guarantees and the 2nd
option was taken. As a result, the Regal directors, who were
also majority shareholders in Regal, acquired shares in
Amalgamated.
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Facts:
• The proposed sale of the cinema and leases fell through –
instead, what was sold was the shares in both the holding co
and the subsidiary owned by individual shareholders - they
were sold at a profit of £2.16 per share.
• Regal sued directors and alleged that they had obtained that
profit by using their offices as directors and were therefore
accountable for it to Regal, and also that in so acting they had
placed themselves in a position in which their private interests
were likely to be in conflict with their duty to Regal.
Held:
• Directors are in breach of their fiduciary duties and should
account profits to Regal.
Regal (Hastings) Ltd v Gulliver
Lord Russell (P. 149)
“The rule of equity which insists on those, who by use of
a fiduciary position make a profit, being liable to account
for that profit, in no way depends on fraud, or absence of
bona fides; or upon such questions or considerations as
whether the profit would or should otherwise have gone to
the plaintiff, or whether the profiteer was under a duty to
obtain the source of the profit for the plaintiff, or whether
he took a risk or acted as he did for the benefit of the
plaintiff, or whether the plaintiff has in fact been damaged
or benefited by his action. The liability arises from the
mere fact of a profit having, in the stated circumstances,
been made. The profiteer, however honest and well-
intentioned, cannot escape the risk of being called upon
to account.”
Profit Rule
• What if the directors acted honestly? See Regal
(Hastings)
• “Duty to act bona fide in the interests of the co” vs “duty to avoid
conflicts of interests”
• Does it matter if the company did not suffer any loss? See
Regal (Hastings)
• What if the company could not have exploited the
opportunity? See Regal (Hastings)
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Business Opportunity
• Duty to avoid conflict of interests prevents a
director pursuing opportunities for himself that he
has a duty to pursue for the company.
• What is the legitimate reach of corporate
opportunities?
• A director is barred from taking up opportunities he
comes by because of his director role. Ex. He learns of
a business opportunity in the capacity of a director. See
Industrial Development Consultants Ltd v Cooley [1972]
2 All ER 162.
Remedies for company
• Breach of equitable duties
• Account of profits (independent of whether company has
suffered any loss)
• Constructive trust (e.g appropriate for property, tracing)
• Rescission
• Injunction
• Equitable compensation
• Re third parties (transaction may be set aside if shown
that the third party was aware [not actual knowledge] a
directors breach of duty)- rescission; constructive trust.
• Breach of common law duties
• Damages
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