Transcript CHAPTER 6 MANAGEMENT OF COMPANIES At the end of this topic you should know: • how power is divided between the board of.

CHAPTER 6
MANAGEMENT OF COMPANIES
At the end of this topic you should know:
• how power is divided between the board of directors and the
company in general meeting;
• what the term “corporate governance” means and what are
some of the commonly debated corporate governance issues;
• the types of directors a company may have and how directors
can be appointed, remunerated, removed from office, and
disqualified;
• director’s rights to obtain access to company records; and
• the duties of the company secretary.
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Division of Powers Within a Company
Board of Directors
A company is an artificial legal entity – a creation of
law. As such, people must act for and on behalf of the
company. Persons authorised to act on its behalf
become the “organ” of the company.
The organs of most companies will be the board of
directors and the members in general meeting. The
internal rules usually provide that the main organ of
the company is the board of directors: s 198A.
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Division of Powers Within a Company
General Meeting
The general meeting becomes the organ of the
company when the company’s powers are expressly
granted to the general meeting by either:
• the Corporations Act;
• the company’s internal rules; or
• ASX listing rules if applicable.
Residual power may also fall to the general meeting.
Where the constitution is silent as to who can
exercise a particular power of the company, the
general meeting will probably be the relevant organ.
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Division of Powers Within a Company
Board vs Members
Where a company’s internal rules include s 198A or a
similar rule, the members in general meeting cannot give
directions to or overrule any action of the board on how to
exercise its powers of management: Automatic Self
Cleansing Filter Syndicate Co Ltd v Cuninghame [1906].
However, the general law has vested residual power to act
for the company when:
• the board is unable to act;
• the board has power to ratify breaches of duty; and
• the directors refuse to initiate action against themselves
for breaches of their duties.
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Division of Powers Within a Company
Single Director/Shareholder Companies
Sections 198E and 201F removes the conventional
division of powers for single director/shareholder
companies.
Section 198E(1) provides that the business of the
company is to be managed by or under the direction
of the director.
Section 201F empowers the single director to appoint
another director by recording the appointment and
signing the record.
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Division of Powers Within a Company –
Summary
Shareholders
Directors
Power to remove directors from
office
Power to ‘recommend’ dividends
Power to approve director
remuneration
Management powers
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Corporate Governance
Corporate governance is a dynamic and evolving
institution which attempts to provide a structured and
binding framework for the resolution of disputes and
conflicts involving members, company officers and
other interested parties.
Corporate governance lays down the rules which are
designed to ensure accountability, particularly from
company officers, and to promote the objectives of
transparency and enhanced shareholder value.
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Corporate Governance
Debates, Reforms and Future Proposals
Originally, much of the debate centred around the
question of whether increased statutory regulation was
preferable to self-regulation.
Government policy in Australia has been to introduce
more stringent statutory regulation as a means of
achieving higher standards of corporate governance, as
least in respect of audit, financial reporting, continuous
disclosure, and margin lending.
More recently, debate has centred on whether current
disclosure requirements for reporting entities have in fact
achieved the desired goals of market transparency and
market integrity.
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Corporate Governance
Debates, Reforms and Future Proposals
In recent years, there has been increasing debate in
Australia and overseas about corporate governance
issues in relation to public companies.
The recent Global Financial Crisis has led to calls for
improving corporate governance standards,
particularly with listed companies.
For a summary of the proposed reforms see [6.130].
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Types of Directors
The terms “director” and “company officer” are defined
broadly in the Corporations Act to cover both
appointed directors as well as “shadow” directors and
“de facto” directors: s 9.
Other non-statutory directors include:
• nominee directors;
• executive directors;
• non-executive directors;
• managing directors; and
• alternate directors.
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Management Positions
Management
positions in
companies (may
overlap)
Director
s9
Formally
appointed
Secretary
(no statutory
definition)
Not
appointed
De facto
Officer
s9
Includes director,
secretary and other
persons in management
Shadow
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Appointment of Directors
Normally, the general meeting by an ordinary
resolution appoints directors: s 201G – a replaceable
rule.
In certain circumstances, existing directors may
appoint a director: ss 201H, 201K, 201J – all
replaceable rules.
In certain circumstances, a personal representative or
trustee of a director in a one-person company may
also appoint a director: s 201F.
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Appointment of Directors
Who can
appoint
directors?
s 201A
number/residency
public company – 3
General
meeting
Other
directors
proprietary company – 1
Check company’s
internal rules
Personal
representative
of incapacitated
director
Single director/
shareholder
companies only
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Restrictions on Appointment
A director must be over the age of 18: s 201B(1).
The must consent to the appointment as a director: s 201D.
Unless leave of a court is obtained, a person can’t manage
a corporation if an insolvent under administration:
ss 201B(2), 206B(3), 206B(4) and 206G.
A person can’t manage a corporation where the person has
been convicted in certain circumstances:
ss 201B(2), 206B(1) and 206B(2).
The company’s constitution may also impose additional
restrictions.
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Company Secretary
Defective Appointments
Every public company must have at least one
company secretary, at least one of whom must
ordinarily reside in Australia: s 204A(2).
However, the appointment of a company secretary is
now optional for a proprietary company: s 204A(1).
If the formal requirements imposed by the
Corporations Act and the internal rules, with respect
to the appointment and qualification of directors and
company secretaries, are not complied with, their
acts will still be valid: s 201M.
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Remuneration of Directors
The internal rules normally provide members with the
power to fix the remuneration of directors: ss 202A, a
replaceable rule, and 202C.
The internal rules may also provide for the board of
directors to appoint a managing director and allow the
board to fix that person’s salary: s 201J, a
replaceable rule.
Additional points to consider on this topic are the
disclosure requirements, excessive remuneration and
related party transactions.
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Resignation and Removal of Directors
A director can resign or be removed from her or his
position.
A company’s internal rules or the director’s
employment contract will specify the method of
resignation or removal.
Directors of public companies may be removed by an
ordinary resolution regardless of what is stated in the
constitution: s 203D.
Unlike a proprietary company director, a director of a
public company cannot be removed by the other
directors: s 203E.
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Disqualification from Office
Both ASIC and the court have broad powers to disqualify
directors.
It is an offence for a person who is disqualified from
managing a corporation to participate subsequently in the
management of a corporation without being granted leave
to do so by ASIC or the court: ss 206F(5) and 206G.
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Removal of Directors
How directors
can be removed
By general
meeting
By operation
of law s 206B
By ASIC
s 206F
By court order
ss 206E, 206D, 1317E
If insolvent
Public company:
s 203D
Private company:
check internal
rules - eg
s 203C
If subject of
management
banning order
Notice of
banning served
Must be director of
2 or more companies,
paying creditors
less than 50c/$
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Access to Information
General law provides that directors are entitled to
inspect company documents to enable them to
discharge their fiduciary and statutory duties properly.
The Corporations Act also gives directors important,
additional statutory rights of access to company
information: ss 290(1), 290(2), 198F and 198F(2).
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