Corporate Governance and Directors' Duties: A Legal Perspective, Study notes of Business

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CONTEXTUAL AND THEORETICAL ISSUES ....................................................................... 5 WHAT IS CORPORATE LAW ............................................................................................................ 5 What is a company? ............................................................................................................ 5 Centrality of the Corporations Act 2001 (Cth) ..................................................................... 5 RAISING COMPANY CAPITAL ........................................................................................................... 6 DIFFERENT PATTERNS OF CAPITAL MARKETS ..................................................................................... 6 THE NATURE OF THE AUSTRALIAN CAPITAL MARKET ........................................................................... 6 CORPORATE SOCIAL RESPONSIBILITY ................................................................................................ 7 CORPORATE THEORIES .................................................................................................................. 7 Categories of Corporate Theories ........................................................................................ 8 2. PARTNERSHIP AND OTHER BUSINESS ENTITIES ............................................................ 10 TYPES OF BUSINESS STRUCTURES .................................................................................................. 10 Company ............................................................................................................................ 10 Sole trader ......................................................................................................................... 10 Association (incorp and unicorp) ....................................................................................... 10 Partnership ........................................................................................................................ 11 Joint Venture ..................................................................................................................... 11 Co-operative (not assessed) .............................................................................................. 11 Trust (not assessed) ........................................................................................................... 11 FACTORS IN DECIDING CHOICE OF STRUCTURE .................................................................................. 12 PARTNERSHIP ............................................................................................................................ 12 Compare preparation to start a business:......................................................................... 13 Single v continuing business .............................................................................................. 13 Rules for identification (s 2 Partnership Act NSW) – A.K.A Default rules .......................... 14 Partnership Act NSW s 2 .................................................................................................... 14 Loans vs partnerships ........................................................................................................ 14 Fiduciary Obligations ......................................................................................................... 15 Partners as Fiduciaries ...................................................................................................... 16 Legal Liability of Partners .................................................................................................. 18 Partnership Property ......................................................................................................... 19 3. COMPANY FORMATION .............................................................................................. 20 COMPANY FORMATION ............................................................................................................... 20 PRE-INCORPORATION CONTRACTS ................................................................................................. 20 TYPES OF COMPANY: S 112 ......................................................................................................... 22 Public vs Private ................................................................................................................. 22 SHARES AND SHARE CAPITAL ......................................................................................................... 24 INSOLVENCY .............................................................................................................................. 28 Voluntary administration .................................................................................................. 29 RECEIVERSHIP............................................................................................................................ 30 COMPULSORY LIQUIDATION FOR INSOLVENCY (AKA ‘WINDING UP’) .................................................... 30 Order of application of company assets ............................................................................ 31 Liquidator’s recovery of property and funds for creditors ................................................ 31 Liquidator may seek compensation from directors ........................................................... 31 4. COROPORATE PERSONALITY ....................................................................................... 32 LIMITED LIABILITY ....................................................................................................................... 32 Corporate personality: Salomon v A Salomon & Co Ltd [1897] AC 22 .............................. 32 3 Corporate personality: Lee v Lee’s Air Farming [1961] AC 12 .......................................... 33 “LIFTING THE VEIL” ..................................................................................................................... 34 Fraud/improper conduct ................................................................................................... 35 CORPORATE GROUPS .................................................................................................................. 36 CRIMINAL LIABILITY .................................................................................................................... 38 Vicarious Criminal Liability ................................................................................................ 38 Direct liability .................................................................................................................... 39 5. CORPORATE CRIMINAL LIABILITY – BINDING THE COMPANY IN CONTRACT ................. 41 C’TH CRIMINAL CODE ACT 1995 .................................................................................................. 41 BINDING COMPANY IN CONTRACT .................................................................................................. 42 Key Rules ............................................................................................................................ 42 Actual authority ................................................................................................................. 43 Apparent/Ostensible authority ......................................................................................... 43 Elements to prove one has ostensible authority – Test in Freeman and Lockyer ............. 44 Indoor Management Rule ................................................................................................. 45 STATUTE TESTS .......................................................................................................................... 46 TEST: Section 126 Agent exercising a company’s power to make contracts .................... 46 TEST: Section 127 Execution of Documents by company itself ......................................... 46 TEST: Section 128 Entitlement to make assumptions ....................................................... 46 SECTION 129 ............................................................................................................................ 48 Section 129(1) .................................................................................................................... 48 Section 129(2) .................................................................................................................... 48 Section 129(3) .................................................................................................................... 48 Section 129 (cont’) ............................................................................................................. 48 Section 130 ........................................................................................................................ 49 6. INTRODUCING DIRECTORS (AND OFFICERS) ................................................................. 50 ROLE OF CORPORATE DIRECTORS ................................................................................................... 50 Directors and Officers ........................................................................................................ 50 Restrictions on being a director......................................................................................... 50 CASES ON ‘DE FACTO’ AND ‘SHADOW’ DIRECTORS............................................................................ 51 PROCEDURE WITH DIRECTORS ....................................................................................................... 53 Appointing directors .......................................................................................................... 53 Removing directors ............................................................................................................ 53 Importance of “independent” directors in corporate governance (listed companies) ..... 53 Director and Executive Remunerations ............................................................................. 54 Attempted solutions for executive remuneration issues ................................................... 55 7. MEETINGS .................................................................................................................. 56 HOW DIRECTORS MAKE DECISIONS ............................................................................................... 56 Directors’ Meetings: Notice Requirements ....................................................................... 56 How Shareholders Make Decisions ................................................................................... 56 DISCLOSURE REQUIREMENTS FOR SHAREHOLDER MEETINGS .............................................................. 57 Who Can Call a Shareholders’ Meetings? ......................................................................... 58 Shareholder Voice at Meetings ......................................................................................... 58 DIVISION OF POWERS ................................................................................................................. 59 INFORMAL CORPORATE ACTS ....................................................................................................... 60 8. INTRODUCTION TO DIRECTORS’ AND OFFICERS’ DUTIES .............................................. 62 9 Theory What is the corporation? Constituency Role for Law Rationale of role for law Managerial Co-ordinator of production; contrast to market Shareholders Strengthen management accountability; empower shareholders Accountability of managers diminished Contract Contracts between self- interested parties; surrogate market Shareholders Minimal regulation Parties not state can find the best way to reduce agency costs Team Production Mediating hierarchy or production coalition of team members; Stakeholders Maintain status quo Theory is to better describe reality not for law reform Communitarian Community of various parties who owe each other mutual duties and support Stakeholders including local community; workers; creditors and shareholders Create duties to all stakeholders Parties unable to protect themselves due to unequal power 38  Qintex claimed Schroders couldn’t do this as currency dealing was done on behalf of another co in the Qintex group, QTL.  Person from Schroders claimed “it was not my practice to ask which of the Qintex companies was responsible for the deal. I . . .did not differentiate between companies in the group” at 268]  Judge found “The facts and documentation point to QTL [another company in the qintex group] as the party to the contract rather than the plaintiff.” On separate entity of co within corporate group see also  The dominant view in Australia is to UPHOLD separate entity  Adams v Cape Industries [1990] 2 WLR 657  Walker v Wimborne (1976) 137 CLR 1(High court) Criminal liability  A company can be criminally liable  Problems with corporate criminal liability: o Finding intent  Difficult to find MR and distil MR in the corporation b/c a corporation is not a natural person o Punishment  How do you punish a corporation thus fines are imposed and if you fine a corporation you may also hurt the creditors o Separating acts attributable to the company from those attributable personally to the actors  Need to do things in order to commit crimes and these are generally done by natural persons – when do you say the crime belongs to the person rather than the corporation?  Different bases of liability: o Vicarious liability o Direct or primary liability o Further statutory bases for holding a company liable Vicarious Criminal Liability  Generally not available at common law (with minor exceptions)  Presumption against can be overcome by statute o Generally (there are some exceptions) cannot be vicariously liable for crime at general law o Vicarious civil liability is fine however criminal vicarious liability, generally NO o Presumption of crim liability can be overcome by statute, thus legislature may address crim liability or may be able to infer from statute crim liability o Involves holding party A liable for the acts of party B – thus all you need is crime to be done by first party Mousell Bros v London and Northwestern Railway [1917] 2 KB 836 (UK C of A)  Clarks working for a company deliberately understated cargo in order to reduce tolls 56 7. MEETINGS Overview: 1. Meetings & resolutions 2. Division of powers between directors and shareholders 3. Informal corporate acts Typical Powers of Directors and Shareholders  Directors o s 198 (replaceable!) – primary power to manage corporation o Includes most decisions relating to company’s business, except if limited by statute or constitution (see non-exhaustive list s 124)  Shareholders o Power to vote on certain major decisions, including: electing directors, changing constitution, changing company type, voluntary winding up etc  But all these powers (of directors and shareholders) are subject to the Constitution, if company as one  Some pty companies give one or more shareholders all management powers, or power to veto any decisions of directors How Directors Make Decisions  Collectively by passing director’ resolutions in meetings s 248C – 248G o N.B: Chair’s casting vote s 248G (This is a replaceable rule thus many companies get rid of this b/c it gives too much power to heads of power)  Or without directors’ meeting o s 238A – circulating resolution  Don’t need to have a meeting but you need every director to sign, if one does not sign it won’t be passed o s 248B – single director companies  N.B: MOST OF THESE ARE REPLACEABLE RULES Directors’ Meetings: Notice Requirements  Notice must be ‘reasonable’, but not strict re formalities o Check corporation constitution for further requirements  Directors must know and agree they are having a meeting How Shareholders Make Decisions  By circulating resolution for unanimous written consent (pty co’s only): ss 249A-B  Or, in shareholders meetings: ss 249C – 251: o About procedures for meetings  Proxy voting systems