AYB230 Corporations Law

SEMESTER 2, 2018
Mr Nathan Lindemann
Lecture 4
Corporate governance and company management (Module
7)
An introduction to Directors’ and officers’ duties (Module 8)
 Lecture 4 overview

– Disruptive example
– Meaning of corporate governance LO 7.1
– Definition of officers LO 7.2
– Decision-making LO 7.3
– Appointing officers LO 7.4
– Directors and officers duties LO 8.1
– Key terms
Disruptive example: where board ceases to
exist?
• How does corporate governance deal with this
traumatic headline:
• “A Congolese airline plane crash in west Africa killed
the entire board of the Perth-based mining
company Sundance Resources ”
– Warning – potentially disturbing content
– http://www.abc.net.au/news/2010-07-03/sundan
ce-vows-to-move-on-after-jungle-crash/890242
 Module 7
corporate governance
 LO 7.1
Corporate governance

https://www.governanceinstitute.com.au/knowledge-
resources/governance-foundations/
 Corporate governance

• Governance Institute of Australia key components of

governance:
– Transparency
– Accountability
– Stewardship
– Integrity
• Requires a governance framework, structure and
specific tools.
 Corporate governance

• Implementing good corporate governance:

 ASX corporate governance
principles
• ASX corporate governance principles:
1. Lay solid foundations for management and oversight
2. Structure the board to add value
3. Act ethically and responsibly
4. Safeguard integrity in corporate reporting
5. Make timely and balanced disclosure
6. Respect the rights of security holders
7. Recognise and manage risk
8. Remunerate fairly and responsibly
 Separation of powers

• Doctrine of separation of powers:

– The members and the managers have distinct
decision-making power and neither can override
the decision-making power of the other.
– Members make decisions about the appointment
and removal of directors, and changes to the
company’s constitution.
– Directors manage the company’s business affairs.
 Agency theory

• Agency theory recognises that members’ interests

and managers’ interests do not perfectly align.
• Agency costs:
– Members must take steps to align members’
interests with their own (e.g. profit-based
bonuses).
– Directors must demonstrate they are acting in the
interests of the members (e.g. act transparently).
 LO7.2
Officers and Directors: s 9
Officer: person
6 limbs
• director
• secretary
• participates in decision-making
• capacity to affect financial standing
• the directors  are accustomed to act
in accordance with their
instructions or wishes.
• Insolvency administrator
Director: person
4 limbs
• Appointed director
• Appointed alternate director
• Not appointed but act in the
position (de facto)
• Not appointed but the directors  are
accustomed to act in accordance
with their instructions or wishes
(shadow)
 Officers figure 7.6

• A company’s officers:
 Officers

• Officer:
– A person who makes or participates in decisions
that can have a substantial effect on the business:
• directors
• company secretary
• other senior managers
• in certain circumstances — a receiver,
administrator or liquidator.
– ASIC v Adler (2003)
 ASIC v Adler 2002

• See 8.3 $4M HIH shares

HIH HIH Casualty purchased
Holding coy Subsidiary

Officer
Adler Paid $10M $4M in tech stocks purchased
NED to invest from Adler Corp (Adler Corp
wanted to off load the shares)

PEE trust $2M in unsecured loans to Adler

interests
 Directors

• Directors:
– person elected or appointed to the board of
directors to carry on the company’s business in
the interests of the company as a whole.
• Proprietary company must have at least one director
— s 201A(1).
• Public company must have at least three directors —
s 201A(2).
 Directors

• Formally appointed director

• Alternate director
– formally appointed to stand in for another director
– s201K(1) (RR): directors can appoint alternates.
• De facto director
– not validly appointed but acts in the position anyway
• Shadow director
– not appointed, but has influence over the directors — they do not
act without the consent and instruction of the shadow director
– DFCT v Austin (1998)
– Standard Chartered Bank v Antico
Standard Chartered Bank v Antico
17

Antico Gardiner Quirk

Directors

BANK GIANT
$30 mill
RESOURCES

Advanced
42% further
[No other significant s/h]
S/H $15 mill

PIONEER
Types of directors
 Chair of directors

• s248E (RR): Directors may appoint a Chair

• Role of Chair is very important in corporate
governance
– Selects the matters, documents to be brought to Board
attention
– Formulates Board policy
– Promotes the position of the company
• ASIC v Rich (2011)
 ASIC v Rich 2011
20

• Mr Greaves is one of four

defendants
• Mr Jodee Rich,
• Mr Mark Silbermann and
• Mr Bradley Keeling.
• Mr Keeling settled ASIC’s
civil claim against him in
March 2003

Photo – Keeling, Murdoch, Packer and Rich

 Managing Directors (CEO)

• Article from 2014:

http://www.businessinsider.com.au/this-is-
what-you-need-to-become-a-ceo-of-an-asx-
200-company-2014-10

• MD may be conferred any of

the powers that directors
can exercise: s198C
 Company secretary

• Company secretary:
– Responsible for aspects of the normal day-to-day affairs and
administration of the company
• Panorama Developments (Guiford) Ltd v Fidelis Furnishing Fabrics Ltd [1971]
• ASIC v Shafron (2012) (James Hardie litigation)
– Public company must have at least one company secretary: s
204A
– Proprietary company does not need a company secretary, but
usually one of the directors will act in the role
– Governance Institute Australia is the professional body who
represents company secretaries
• http://www.governanceinstitute.com.au/
 Company secretary

• Duties of the company secretary:

 Senior managers

• Senior managers:
– An officer who is not a director or company
secretary, but makes or participates in decisions
that can have a substantial effect on the business.
 LO 7.3
Roles of Directors and Members
• Members (owners) cannot interfere in the decisions
made by directors.
• Sources of conflict between members and directors:
– the agency problem — members’ and directors’
interests are not perfectly aligned
– differences of opinion as to what actions are in the
best interests of the company
 Decision-making and company
management
• How does the law allocate that decision-making
power and regulate its exercise?
• “Organic principle”
• Power to make decisions is divided between:
– the members in general meeting
– the board of directors
• Division depends on the constitution and general
principles of company law
 “organic” theory

Organic principle – Board has

primary decision making Board power Members
power s 198A (RR): A s198A power
company’s business is to be general specific

managed by/under the

direction of, directors
One cannot interfere with powers of other
Automatic Self-Cleansing Filter Syndicate v Cunninghame;
John Shaw & Sons

AYB230 Corporations Law

Semester 2 2011 / Slide 27

 Separation of powers

• Separation of powers:
 Board meetings

• To be a formal board meeting:

– Reasonable notice must be given: s 248C (RR)
– the notice must include an agenda
– must be declared to be a formal board meeting
– must have a quorum present: s 248F (RR)
• quorum is 2 directors unless the directors determine
otherwise
• A resolution requires more than 50 per cent of the vote in order
to be passed: s 248G (RR)
• Circulating resolutions: directors can pass a resolution without
a meeting if circulate a resolution and all directors sign: s 248A
 Board meetings

• Sample agenda for a meeting of the board of

directors:
 Minutes of Board Meetings

• s 251A(1)(b): Proceedings, resolutions of directors’

meetings must be recorded in co’s minute book (1 mth)
• Minute book also records circulating, other resolutions
without a meeting
• Chair must sign the minutes within “reasonable time”
(s251A(6))
• ASIC v Macdonald: evidentiary value? (15/2->7/4)
 Directors’ access to information

• Statutory and common law rights to receive

information
• Right to access “financial records” (s290(1))
• Common law right to “information” is broader
• Right to inspect company’s books, in relation to legal
proceedings (s198F)
 Members’ powers

• Members cannot instruct the board of directors

• Members can, in accordance with the company’s
constitution:
– remove and replace directors
– limit the directors’ powers
– vest specific powers in the members at a general
meeting
– apply to wind up the company due to oppression
– sell their shares and exit the company
– Vote to change the rules.
What options are available to members who disagree with their
directors’ management decisions?

• See 7.3.2

1.

2.

3.

4.
 LO 7.4
Appointment of directors

• Members in general meeting: s201G

• replaceable rules or constitution
• “Casual” vacancy s201H: directors
• proprietary company, confirmed by members in 2 mths
• public company confirmed by members at next AGM
• s205B(1): co must notify ASIC of any new directors’ details in 28
days.
 Directors - recap

• Minimum number of • First directors

directors must give
• 1 x Pty Ltd consent,
• 3 x Public • named in the
application for
s201A s117 incorporation

s201J s201K
• the directors can appoint • a director can
one of them to be managing director appoint an alternate
director
 Appointment of directors

Who can’t be appointed?

• s201B(1): Persons under age 18
• s201B(1): Companies
• s206A(1): disqualified persons
– s201B(2): if the person is disqualified, can only be appointed as
director with leave granted by ASIC or court.
 Disqualification: s206B-F

Automatic • bankrupt
• recently convicted of an offence related to a company
s206B

• s206C breaches of specific provisions of the Act

Court • s206D involved in the failure of two or more companies in the past 7
years
s206C,D • s206E involved in 2+ breaches of the Act
• Period that court decides

• The person was an officer of 2 or more co’s; and

• While they were an officer, or w/in 12 months after,
ASIC • the co’s were wound up and
• a liquidator lodged a s533(1) report (co cannot pay its unsecured creditors
s206F more than 50c in the dollar)
• 5 years
 Disqualification

• Person can apply to court for leave to manage a coy while

disqualified: s206G(1). Court may impose conditions. It looks at:
– Circumstances of disqualification
– Nature of the applicant’s involvement
– Applicant’s general character and conduct since
disqualification

• Disqualification is intended to:

– protect members
– punish directors who act improperly
– deter improper behaviour by others
Disqualification on application by ASIC to
court
ASIC v Vizard (2005) 145 FCR 57
• Businessman and celebrity on board of Telstra
• Found out information in role as director of Telstra about
investment in 3 software companies
• Used information to own benefit by buying shares through
an arrangement with his accountant and payment through
a family trust
• Breach of duty as a director (topic 5 & 6)
 Class activity

ASIC v Vizard (2005) 145 FCR 57

– Admitted his breaches
• civil penalty fine of $390,000
• Disqualified from being a director
for 10 years
• <Watch Library media clip>
• http://search.informit.com.au.ezp01.library.qut.edu.a
u/documentSummary;dn=TEV20081800508;res=TVN
EWS

• Did he receive ‘punishment’ beyond what directors

usually receive?
 Remuneration of directors

• Directors’ remuneration: The members authorise the remuneration of

directors, but the type and level of remuneration is a decision for the board.
 Vacation of office

• A director may vacate their position:

– Voluntarily: notice of their resignation
– Condition in constitution
• via the rotation policy of public companies,
where directors stand down and offer
themselves for reappointment every few years.
 Removal of directors

• The power of members to remove directors is one of the main

ways members can influence the overall management
direction of the company.
• By members s203C • By members
• Replaceable rule s203D
• Detailed process –
Pty 2 months notice
Public
Ltd

Pty
Public
Ltd
• By directors only if • Cannot be
constitution allows removed by
directors s203E
 Module 8
Directors’ & Officers’ duties
 LO 8.1 Framework for D&Os duties
– Introduction
 Who owes D&Os duties?
 Who are D&Os duties owed to?
 Overview of fiduciary duties
 Comparison with statutory duties
 Remedies/consequences
 Who owes duties?

• At common law, directors and managers are in a

fiduciary relationship with the company:
 Hospital Products v US Surgical Corp (1984)
 Green v Bestobell Industries Ltd (1982)

• Statute
– ss180-184: Directors & ‘officers’ s9
– s182 & s183D & O & employees’
 Class activity: constraints on boards?

• We see that under the organic principle,

boards have wide powers over the
companies operations
• In what circumstances would you prefer to
see a board not act – that is - there must
be some “natural” constraint we would
want to impose?
• Video – the squeaky clean principle
• https://www.youtube.com/watch?v=84lz1u
6n5sI
Directors’ & Officers’ duties

Directors must also avoid allowing the

company to trade whilst insolvent
 Breaches of duties

• ASIC will take action against an officer in breach of

their statutory duties if is is deemed of sufficient
public interest.
• The company, members or other officers can use the
common law to take legal action in response to a
breach. The action will usually seek damages.
• The company can take legal action against an officer
if they breach their contract.
 Breaches of duties

• Actions for a breach of an officer’s duties:

 Consequences of breach of duty -
Corporations Act
• Civil penalty
 s1317E: can apply for a declaration of contravention.
Once this is done, THEN can ask for:
 s1317G: pecuniary penalty orders (up to $200,000
per breach)
 s206C: ASIC may also apply for disqualification
 s1317H: can apply for compensation for the company
• s1311: makes most breaches of the Corps Act a criminal
offence
 NEXT WEEK

Directors’ and officers’ duties continued

Fiduciary duties
(modules 8 & 9)