Understanding Directors' Duties and Conflicts of Interest in Australian Companies, Exercises of Business

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TOPICS COVERED TOPIC 3: FORMATION AND CIASSIFICATION OF COMPANIES TOPIC 4: INCORPORATION AND ITS EFFECTS TOPIC 5: CORPORATE FINANCE TOPIC 6: THE CONSTITUTION AND REPLACEABLE RULES TOPIC 7: COMPANY ORGANS AND THE DIVISION OF POWER TOPIC 8: THE BOARD OF DIRECTORS AND THE GENERAL MEETING TOPIC 10: OVERVIEW OF DIRECTORS’ DUTIES TOPIC 11: DUTY OF CARE SKILL AND DILIGENCE TOPIC 12: DUTY TO ACT IN GOOD FAITH TOPIC 13: DUTY TO AVOID A CONFLICT OF INTERESTS TOPIC 14: RATIFICATION AND RELIEF FROM LIABILITY TOPIC 15: SHAREHOLDERS' DERIVATIVE ACTION TOPIC 16: SHAREHOLDERS’ PERSONAL ACTIONS TOPIC 17: OPPRESSION, WINDING UP AND STATUTORY INJUNCTION FORMATION & CLASSIFICATION STEP 1 – INTRODUCTION ‘Corporation’ is broadly defined to include ‘companies’, ‘body corporates’ (whether incorporated in this jurisdiction or not) and unincorporated bodies that may sue/be sued and hold property (s57A(1)). A company (co) is an artificial entity recognised by law as a legal person with its own rights and liabilities (s124). Co’s are corporations (corps) registered under the Corporations Act (CA) (s9). STEP 2 – CLASSIFICATION ACCORDING TO LIABILITY OF MEMBERS The types of co’s that can be registered are set out at (s112(1)): Co limited by shares • Member liability is limited to the amount owing (if any) to the co for the shares bought (s516). • “Limited” or “Ltd” must be in the co’s name (s148(2)). Co limited by guarantee • Member liability is limited to the amount they have undertaken to contribute to the co’s property if the co is wound up (s517). • Has no share capital and no power to issue shares (s124(1)). Unlimited with share capital • No limit on the liability of members (s9). • Past and present members may be liable (s515). No liability (mining co’s only: s112(2)) • Members are not liable beyond the paid amount – not even on unpaid amounts (s254M). • A NL co must not engage in activities outside its mining purpose objects (s112(3)). • Must have “No Liability” in its name (s148(4)). STEP 3 – PUBLIC VS. PROPRIETARY COMPANIES Proprietary Companies • A proprietary co is a co registered as such under the Act (s45A(1)). • Must have “Pty” or “Proprietary” in its name (s148). • Must have no more than 50 non-employee shareholders (SH’s) (s113(1)). • Must not offer shares to the general public (s113(3)) – cannot engage in any activity requiring disclosure to investors under Ch 6D. - Can offer shares to existing SHs or employees however (s113(3)). Large vs. small proprietary companies • A pty co is small for a financial year if it satisfies 2 of the following 3 criteria (s45A(2)): a. Consolidated revenue for the co’s (and its subsidiaries’) financial year is less than $25 million. b. Value of consolidated gross assets at end of co’s financial year is less than $12.5 million. c. The co (and its subsidiaries) has fewer than 50 employees at the end of the co’s financial year. • A large pty co will have different financial reporting obligations to a small proprietary co (ss292-4). Public companies • A public co is one that is not proprietary (s9). • May offer shares to the general public (must meet disclosure requirements in Ch 6D). • May list on ASX if they comply with listing rules. • Listed co’ is one included in the official list of a prescribed financial market (e.g. ASX). - Minimum of 1 member (s114). Constitution (const.) is publicly available via ASIC. On the facts, [Co] is a [pty/pub/etc.] [limited by shares/guarantee/etc.] and therefore [P/D]’s liability is… … (b) Profits Rule RED FLAGS: • Taking up a corp opportunity • If q asks if SH’s are required to hand over profits to co RULE: a fiduciary must not use their fiduciary position or opportunity/knowledge gained from it to make an undisclosed personal gain (Regal). Fiduciary = drs (Regal; Aberdeen) and senior employees (Vic Uni). Irrelevant: • that the co cannot exploit the opportunity (due to lack of resources etc) (Regal) • whether dr made a profit (Regal) • that the co did not suffer loss (may have even benefited) • if the transaction was fair from the co’s point of view • if making profit for personal gain, someone else or another co (Regal) The duty will survive dr’s resignation where (Canadian Aero): 1. Resignation was prompted/influenced by personal ambitions, or 2. One’s position with co rather than a fresh initiative led to the opportunity Regal (Hastings) Ltd v Gulliver FACTS Regal owned a cinema. Took out leases on two more, through a new sub, to make an attractive sale package. Landlord wanted them to give personal guarantees – did not want to do that. Instead LL said they could up share capital to £5,000. Regal put in £2,000, but couldn’t afford more (could have got a loan). Four directors put in £500, Chairman got outsiders to put in £500. Board asked the co solicitor to put in last £500. Sold business and made a profit of nearly £3/share. Buyers brought an action against the dr’s – profit was in breach of their FD to the company – no fully informed consent from the shareholders. HELD o Directors had to account for their profits to the company as they made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office” – could not take up opportunity o Directors need shareholder consent. “The liability arises from the mere fact of a profit having, in the stated circumstances, been made” (Lord Russell) Industrial Development Consultants Ltd v Cooley FACTS C – IDC architect & MD. IDC miss out on gas board K. Offered K to C. C told board he was speaking to them in private capacity, even though IDC MD. C tells IDC board he is sick & wants early release from employment K. They accept. C takes up gas board K. IDC find out and sue. HELD o Roskill J: irrelevant that unlikely IDC would get contract even if C had complied with his duties. Irrelevant that opportunity communicated to C in his personal capacity rather than as director during negotiations. C put himself in conflict position by dealing with gas board while still acting as MD. Info. should have been passed on to IDC. Canadian Aero Service Ltd v O’Malley FACTS C engaged in topographical mapping. Mr O was CEO and Mr Z was Exec VP. C learned that Canadian government might grant financial assistance to Guyana to have some mapping carried out in that country. Mr Z visited G a number of times and made various presentations on how the mapping might be done on behalf of C. O&Z resign & form Terra Surveys. Mr O approached Canadian government and said new co was interested in the work and they were invited to bid along with four other companies, including C. Terra Surveys win contract. Canaero sue. HELD o Couldn’t obtain for themselves property or business advantage belonging to co or that it was actively pursuing. Not relevant that co could not have obtained contract. o Fiduciary can’t divert to themselves or another co with which they are associated a maturing business opportunity which the co is pursuing - even after resignation where pursuing opportunity sought by co or where was position in co, rather than a fresh initiative, which led to the opportunity. Relevant factors: Factors in assessing whether fiduciary used their position/knowledge to make personal gain (Canadian Aero): • Position/office held • Nature/ripeness/specificity of the corporate opportunity • The fiduciary’s relation to the opportunity – did opportunity come to fiduciary solely by virtue of their position (Regal)? • Amount of knowledge possessed and circs in which it was obtained • Whether the knowledge was special/private; or merely publicly available (Peso) • The length of time between the resignation and the new endeavour • The circumstances under which the relationship was terminated (resignation, retirement or discharge) NOTE: re: permitting dr to benefit – only members in GM can ratify a breach (Regal) unless board represents all SH’s (QLD Mines). Requires fully informed consent of SH’s (Regal) – mere disclosure and abstaining from voting insufficient. [P] will argue [D] has breached this duty in his/her role as fiduciary by [APPLY FACTS] and that this amounts to using their position or opportunity/knowledge gained from it to make an undisclosed personal gain (Regal). Outcome The contract will be voidable subject to equitable bars to rescission. Co may seek equitable remedies: injunction, constructive trust, account of profits, equitable compensation. Ratification may provide a defence of sorts. But cannot ratify if: • Members not given fully informed consent; • Ratification found to constitute oppression of minority; • Company becomes insolvent; • Acts are illegal or beyond company power (i.e. issue shares for improper purpose); • Acts represent misappropriation by directors of company property. • SHs cannot release drs from stat duties imposed under stat law: Carabelas. May affect penalty imposed. We must now consider ss182/3 which have effect in addition (not derogation) to any other law (s185). Peso Silver Mines Ltd v Cropper FACTS C - MD of Peso. P approached by Dickson to sell mining claims. P board refused because had limited finance at the time and was receiving 2-3 similar offers a week. Consulting geologist of P suggests he & C buy D’s claims. Together with 2 others, they buy claims at same price offered to P. 2 years later change in control of P – C had to disclose his interest in the syndicate to board. C dismissed when he refused to transfer his interest to P. HELD o Held: C did not have to account to P for opportunity – C not acting as a dr – private capacity. o D offered claims to P and C had duty as dr to take part in the decision of the board. C acted in good faith, solely in the interests of P and with sound business reasons to reject the offer. o Offer to P not accompanied by confidential information. C, as director did not have access to confidential information by reason of his office. o When C was approached later, it was not in his capacity as a director, but as an individual. QLD Mines v Hudson FACTS H - MD of QM. Formed to acquire/exploit uranium mining options. 49% shares owned by company controlled by H (AOE) and 51% by company controlled by Kormann (Factors). In absence of uranium opportunities QM involved in iron ore mining. H&K approached Tas Govt to apply for mining licence. H used resources and good name of QM in negotiations but formal application made in own name as intended to form new co for iron ore mining. When licence issued, finances of K and Factors were in crisis. Meeting held where K told other co-venturers (H and chairman of QM) that he couldn’t finance project. K and Chairman tell H okay for him to form new company to use licence. H resigns as MD of QM to pursue iron ore project. Remained dr for 10yrs. QM claimed account of H profits from project. HELD o No breach: either because co, by rejecting opportunity had put it outside scope of H’s relationship with company, orbecause company had given fully informed consent for H to go ahead. o But in this case board represented all SH, therefore may argue it was approved by SH.