CHAPTER 13 DUTIES OF DIRECTORS AND OTHER OFFICERS PART 3 Conflict of interest and disclosure At the end of this topic you should.

Transcript CHAPTER 13 DUTIES OF DIRECTORS AND OTHER OFFICERS PART 3 Conflict of interest and disclosure At the end of this topic you should.

CHAPTER 13

DUTIES OF DIRECTORS AND OTHER OFFICERS PART 3 Conflict of interest and disclosure At the end of this topic you should know: • the requirements under the general law and the Corporations Act for conflicts of interests; • the requirements under the general law and the Corporations Act for disclosure of interests; • how directors may be excused from breaches of their duties; and • to what extent directors can be insured against personal liability.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Duty to Avoid Conflict of Interests

All fiduciaries are under a duty to avoid actual or potential conflict of interest situations. The duty is a strict one.

A director can be in breach even though the director acts honestly and does not stand to make a profit.

A director can also be liable even if the company cannot proceed with the transaction in question.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Source of Duty

The duty arises out of the: • General law (Fiduciary Duties); and • Statutory duties (ss 182-184).

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Source of Duty

The duty gives rise to a number of disclosure obligations, including: • the requirements in ss 191-194, 205G (listed companies) and 200A-200J (retirement payments); • Ch 2E (related party transactions); and • Pt 7.10, Div 3 (insider trading provisions).

For listed companies, see also ASX Corporate Governance Principles and industry associations.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Examples of Conflict of Interest

• Contracts with the company:

South Australia v Clark

(1996).

• Personal Profits:

Regal Hastings v Gulliver

[1942].

• Bribes & Undisclosed Benefits:

Furs Ltd v Tomkies

(1936).

• Misuse of Company Funds:

Paul A Davies (in liq) Pty Ltd v PA Davies

[1983].

• Taking up a corporate opportunity:

Cook v Deeks

[1916].

• Using confidential information:

ASIC v Vizard

(2005).

• Competing with the company:

Bell v Lever Bros

[1932].

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Statutory Duties – Improper Use of Position or Information

Section 182 reinforces the general law principle that a person in a fiduciary (that is, a position of trust) should not improperly use their position to make any gain, or cause detriment to the corporation.

Section 183 supplements the general law fiduciary duty to avoid conflicts by improperly using company information for any gain, or cause detriment to the corporation.

“Improperly use” refers to an abuse of power or the doing of an act which the officer or employee in question knows (or ought to know) that he or she has no authority to do:

R v Byrnes

(1995).

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Remedies and Consequences for Breach of Directors’ Duties

The common law and equity developed a number of remedies to compensate successful plaintiff companies pursuing directors or company officers for breach of fiduciary duties including: • common law damages; equitable compensation; account of profits; rescission of contract; and constructive trust and injunctions.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Remedies and Consequences for Breach of Directors’ Duties

Sections 180-183 are civil penalty provisions. The maximum penalty for a civil penalty order that a court can impose under s 1317G is $200,000 for each contravention.

Where directors or company officers breach their duty recklessly or with intentional dishonestly the director or company officer may be liable for criminal prosecution: s 184.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Disclosure of Interest – General law

There is a requirement that directors involved directly or indirectly in a contract with the company disclose that interest to the general meeting, not just to the chair or the board of directors:

Furs Ltd v Tomkies

(1936).

If this requirement is breached, the contract is voidable at the option of the company:

Kinsela v Russell Kinsela Pty Ltd (in liq)

(1996).

The general law permits a director who is a member to vote in a general meeting on a matter in which the director has a conflict of interest (

North West Transportation Co Ltd v Beatty

(1887))unless the director controls the voting power or there is a connection with a “related party transaction”.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Disclosure of Interest – Statute

The duty to disclose in s 191 (1) applies to all public and proprietary companies except for single proprietary companies: s 191(5).

A director must disclose any material interest except those interests listed in s 191(2).

If a director of a proprietary company discloses a material personal interest as required by s 191, the company’s internal rules may allow that director to vote and retain any personal benefits from the transaction in question: s 194.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Disclosure of Interest – Statute

A director of a proprietary need not disclose an interest if the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company: s 191(2)(b).

A director may give fellow directors standing notice of the nature and extent of an interest: s 192.

Disclosure is to fellow directors at a board meeting, not to the general meeting as required by the general law.

Sections 191 and 192 take effect in addition to any general law rules about conflicts of interests and any relevant provisions in a company’s constitution: s 193.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Relevant Issues – Conflicts of Interest

Disclosure obligations Board meeting All companies s 191 General meeting All companies under general law Reinforced for public company by Chapter 2E  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Disclosure of Interest

Board meeting Private company s 194 replaceable rule: can vote Public company s 195 can’t vote unless exempted Entitlement to vote General meeting General law permits voting by directors who are members; but there are restrictions Chapter 2E prohibits voting by directors on related party transaction  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Disclosure of Interest – Consequences of Contravention

A breach of s 191(1) is a criminal offence.

The contract may be voidable at the option of the company if the company’s constitution required the director to make disclosure and the director failed to comply with that requirement, in addition to breaching s 191(1):

Camelot Resources Ltd v MacDonald

(1994).

Directors of public companies with private interests in company transactions have additional disclosure and voting obligations under ss 195, 205G, Pt 2D.2 and Ch 2E.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Related Party Transactions

Subject to a number of exceptions, the rules in Ch 2E provide: 1. A public company or entity controlled by a public company must not “give a financial benefit” to a “related party”: s 208.

“Related parties” is defined in s 228.

“Giving a financial benefit” is defined in s 229.

4. There are a number of exceptions to the prohibition.

5. Contravention of s 208 does not invalidate a transaction and is not an offence by the public company or entity, but is a civil penalty, and if involves dishonesty, is a criminal offence: s 209.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Exoneration and Relief for Breach

A director may be excused from civil liability arising from a breach of the director’s general law duties by: • the members in general meeting – ratification; • the company’s internal rules; or • the court.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Exoneration and Relief for Breach

Ratification is not available where: • there is a fraud on the minority; • the company is near insolvency, or would prejudice creditors; • it would defeat a members’ personal right; • it would be oppressive; or • there are breaches of statutory duties.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Exoneration and Relief for Breach

A constitution that purports to exempt, indemnify or insure a contravention of ss 199A or 199B is void: s 199C.

Under s 1318, officers may be relieved of liability if they have acted honestly and, according to the court, “ought reasonably to be excused”:

Edwards v A-G

(NSW) (2004).

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

CHAPTER 13 DUTIES OF DIRECTORS AND OTHER OFFICERS PART 3 Conflict of interest and disclosure At the end of this topic you should.

Transcript CHAPTER 13 DUTIES OF DIRECTORS AND OTHER OFFICERS PART 3 Conflict of interest and disclosure At the end of this topic you should.

CHAPTER 13

Duty to Avoid Conflict of Interests

Source of Duty

Source of Duty

Examples of Conflict of Interest

Statutory Duties – Improper Use of Position or Information

Remedies and Consequences for Breach of Directors’ Duties

Remedies and Consequences for Breach of Directors’ Duties

Disclosure of Interest – General law

Disclosure of Interest – Statute

Disclosure of Interest – Statute

Relevant Issues – Conflicts of Interest

Disclosure of Interest

Disclosure of Interest – Consequences of Contravention

Related Party Transactions

Exoneration and Relief for Breach

Exoneration and Relief for Breach

Exoneration and Relief for Breach

Directory