LBE week 7

Directors' Duties- duty to act in good faith and for a proper purpose and s181. Conflict of Interest Statutory duties ss182-183

Duty to act in good faith in the best interest of the company as a whole- Broad duty that focuses on good faith and whether or not they are acting honestly. We look at company and shareholders collectively. We've also seen there is protection for creditors and employees in certain circumstances. We generally focus on the company.How did this operate relating to corporate groups? Must remember principle of separate legal personality. A company is separate from other members in a group of companies. When you apply this, what you end up with is that directors owe duty to act in best interest of particular companyTest comes out of Charterbridge case (where they take a decision that may be taken to benefit another company in the group) is whether a reasonable person could have reasonably believed that the benefit is for the best interest of the company they were director of. The exception applies in relation to wholly owned subsidiaries, if not wholly owned you have minority shareholders that would be disadvantaged s187

Equiticorp Finance v BNZ- Uruz sub of Equitycorpy borrowed 200m from BNZ. BNZ wanted two other sub to use deposits they have with the bank to pay Uruz loan. Issue was in relation to the directors of the other subsidiaries to agree to give their funds to Uruz. So it's arguable that they were not acting in the best interest of their subsidiaries, however if they didn't pay the loan then the whole group may have failed so because of that potential consequence directors were found to NOT have breached duty

Duty to act for a proper purpose- It's more understandable when you look at it in relation to particular powers, and these caases often come up in the context of the power to issue shares. Courts say directors can issue shares-> the proper purpose of which is to raise capital usually butalso to issue shares as part of employee share scheme. The most usual purpose is to raise capital however what is not a proper purpose is to play around with the power balance of the shareholders e.g. issue shares to one group of shareholders so they have a majority where they didn't before, or people you get along with so you aren't taken over

Problem comes up when there are mixed purposes Howard Smith v Ampol Petroleum The board of Millers issued shares to Howard Smith and the impact was to take Ampol from the majority position they held to minority position. The Board of Millers was careful to link the number of shares they issued to their demonstrated need for capital. Court said they didn't believe them and that their DOMINANT purpose was 'was your purpose to defeat the takeover'

Whitehouse v Carlton Hotels (1986) "but for" test The facts of which are there was a family company controlled by the father who was the family director and held A class shares and his wife held B class shares that would have voting rights under his death. Only have voting rights on death if held by original holder. Assumption he was operating on was that when he died his wife would not have control and Cclass shares had no voting rights at all. Parents divorced and sons lined up with dad and daughters lined up with mum the situation would potentially give women control on his death SOhe then issued B-class shares to the sons in order to avoid the wife having control when he did but then fell out with the sons. He was saying his purpose was not proper (because he wanted to defeat his wife) and the court agreed that it was invalid because it was an attempt to re-aign shareholder on death

Kokotovich Construction v Wallington Issue of shares to children invalid for improper purpose of manipulating the voting power. Courts have to determine what the proper purpose of the power is and where the purposes are mixed what the dominant purpose is. Company funds were used to promote certain directors over other potential nominees and the court said that wasn't a proper purose and asn't part of the directors role to lobby for directors. It was the case because material was emotional and misleading. Had it just been information that would have been ok as it would have been seen as proper purpose but not to actually lobby in a hard core marketing way

Permanent Building Society v Wheeler (1994) Purchased land at twice it's value (not part of it's normal sort of business) the effect of which was to enable vendor to meet it's obligations to purchase company controlled by wheeler. Indirectly wheeler is benefiting out of this transaction and was chair of PBS. Holding was exec director of PBS. Their purpose in approving purchase of land wasn't to make profit but to enable other transactions to go ahead which would benefit them. Hamilton found to breach duty of care to society and had not warned of the risks.

Advance Bank v FAI directors used company funds to promote certain directors over other potential nominees. Not part of directors role to lobby for particular directors. Had it just been information of the people who were standing for election then that would be proper purpose to inform shareholders but not to actually lobby for some over others.

Australian Metropolitan Life Assurance v Ure When a transfer of shares occurs directs have discretion to refuse register of transfer which must be exercised for a proper purpose. Proper purpose is prevent someone solvent becoming member

ASIC v Adler [2002] where 10m went from HIH to PEE which  went to buy HIH shares to increase price and also to purchase from Adler Corp shares in various tech companies and there were loans to adler and adler at no interest. breach of s181 duty to act for a proper purpose because purpose was not to act in best interest of HIHC but to gain an advantage for himself. Normal investment safeguards had been bypassed.

Consequences of breach of duty to act for proper purpose If we ooh at common law duty we're looking for damages for breach but possible that other remedies are appropriate. If we're looking at breach of s181- civil penalty provision- part of two tiered regime where ASIC can say section has been contravened and if there is a breach the court can disqualify a director, order to pay penalty and order to pay compensation for loss or damageIt may be there that is sufficient evidence to show that director was acting dishonestly

Fiduciary duties to avoid conflict of interest, duties of good faith, put other people's interests ahead of your own, directors have to put company's interest ahead of their own. Duty not to make undisclosed or secret profit from position.

Duties to avoid conflicts of interest Aberdeen Railway Company v Blaikie Bros (1854) This idea of perception where people should have confidence that there is no conflict of interest, must not be in a position where there is potential for conflict of interest

Phipp

Phipps v Boardman [1967] We need to be sensible, REAL possibilities not far fetched. Duty to avoid conflict of interest Can arise in other ways (not just duty to company and personal interest) but direct may be director for two companies or on board. Also may be that as a director you may not stand to personally benefit out of something but if it's going to a spouse or child then may be conflict because you have interest in that person's welfare 

State Bank of South Australia v Marcus Clark Clark was managing director and CEO of bank and also director or equiticorp. The benefit to Clark came through a change of transactions being able to be proceeded with. Equiticorp was owed money by APA (who had liquidity problems) but had an asset, a company called Oceanic. SBSA bought Oceanic for $59 million well above FV of 21million. Now APA can pay equiticorp and Clark benefits.SBSA did not obtain independent valuation and Clark had breached his duty to avoid conflict of interest and duty of care.

Permanent Building Society v Wheeler (1994) Hamilton, the managing director who didn't stand to gain personally out of the transaction was found to have breached duty of care to the company (court found he had a duty to bring to the other directors information which would involve a proper vote on, so assisted in conflict of interest but not duty of care)******

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