DIRECTORS AND CORPORATE MANGEMENT DIRECTORS FIDUCIARY DUTIES 1 Who is a director? 'Director' is defined in s.9 Corporations Act as follows: a) A person who: 1) Is appointed to the position of a director; or 2) Is appointed to the position of an alternate director and is acting in that capacity b) Unless the contrary intention appears, a person who is not validly appointed is a director if 1) They act in the position of a director ('de facto director') or 2) The directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. ('shadow director') 2 Who is a director? De facto directors (s9 (b) (1)) Need not be officially appointed: The test is whether they were acting in the position of a director May have resigned: The test is whether the tasks they performed were those normally undertaken by director 3 Who is a director? Alternate directors (s.9 (a) (ii)) is a person appointed to act as a \"fill-in\" for a director who for some reason at the time is unable to act as a director. The alternate director is a director only at the time they are called upon to act in the place of the absent director. 4 Types of directors Managing Director appointed pursuant to s201J and may take all the board's powers under s198C Chair of Directors exercise procedural control at meetings (s248E) and signs the minutes (s249U) 5 Types of directors Nominee Directors are often appointed to represent the interests of a particular class or classes of shareholders. example: employees may be entitled, pursuant to the company constitution, to elect a director. a subsidiary's directors may be nominees of the holding company. 6 Types of directors Executive Directors full-time employee of the company and as such owe contractual, common law and statutory obligations to the company. Non-executive Directors not involved in full-time management of the company and not an employee. Often these are experts who can provide specific expertise in relation to certain areas of the company's business 7 Appointment of directors s201A requires: Public company must have at least 3 directors Proprietary company to have at least 1 director Restrictions on appointments: must be an individual and not a company (s201B(1)) must be at least 18 years old (s201B(1)) the person must consent to appointment as a director (s201D) must not be disqualified from being a director (s201B(2)) 8 Appointment of directors When companies are formed, the directors will be those persons named in the application to register the company lodged with ASIC. Post-registration, directors can be appointed by: Shareholders in general meeting (s201G - replaceable rule) In some cases other directors (s201H - replaceable rule) 9 Removal of Directors Directors can be removed by the shareholders in general meeting however Note that in proprietary companies - the replaceable rules or constitution govern removal of directors (s 203C) and accordingly 'entrenchment' of directors is possible (governing director) In public companies - the directors can be removed by shareholder resolution regardless of any provisions in the constitution (s203D) 10 Disqualification from Management Automatic Disqualification (s 206B) Convicted of certain offences Bankruptcy Entering a personal insolvency agreement Period of disqualification is 5 years plus up to a further 15 years 11 Disqualification from Management By court order: Contravention of civil penalty provisions (s 206C) - unlimited disqualification Manage 2 or more failed companies within last 7 years (s 206D) - 20 years (maximum) disqualification Repeated contraventions of the Corporations Act (s 206E) - unlimited disqualification 12 Disqualification from Management By ASIC directly (s 206F) A director of 2 or more companies that have gone into liquidation within last 7 years paying unsecured creditors less than 50% of their debt. Period of disqualification 5 years (maximum) 13 Directors Duties Director's sources: duties arise from 3 main 1) General Law - Fiduciary duties 2) Corporations Act - Statutory duties 3) Company's constitution and replaceable rules 14 Directors' Fiduciary Duties Classification of fiduciary duties: A. Loyalty and Good Faith Duty to act in good faith and in the best interest of the company Duty to use power for a proper purpose Duty to avoid conflicts of interest Duty to retain discretion B. Care and Diligence Duty to act with reasonable care and diligence 15 Directors' Fiduciary Duties Directors owe their fiduciary duties to the company. Breach of fiduciary duty is enforced by company. If the company is in liquidation, it will be the liquidator who has power to bring actions on behalf of the company. ASIC, on the other hand, enforces the statutory duties 16 Directors' Fiduciary Duties Where there is a breach of the fiduciary (general law) duties the company seeks a remedy (an order compensating the company for any loss sustained) Note that where there is a breach of the statutory duties ASIC will seek a penalty (punishment) Remedies for breach: Damages (what the company has lost) An account of profits (what the director has gained) Rescission of a contract Injunction (an order requiring or restraining a certain action) Constructive trust arrangement 17 Who is the company When a company is solvent the directors should be aware of the shareholders interests Parke v Daily News When a company is insolvent the directors should be aware of the creditors interests Kinsela 18 Ratification Ratification is available for general law (fiduciary duties) breaches. When directors breach their fiduciary duties, the company (via a shareholders general meeting ) may ratify (approve or forgive) the directors. Limitations in shareholders ability to ratify: Ratification is not possible if the company is insolvent Kinsela v Russell Kinsela Pty Ltd When the company is insolvent the creditors are at risk 19 Ratification Ratification will not valid if there is a fraud on the minority shareholders Cook v Deeks Ratification is not available when there is a breach of statutory duties Angus Law Services Pty Ltd v Carabelas: \"The Corporations Act is federal law enforced by ASIC. Thus the shareholders meeting can't ratify the directors\" Ratification is not available when a director acted fraudulently or dishonestly 20 Duty to act in good faith To act in good faith means the director must genuinely believe that they are acting for, and in the best of interest of the shareholders as a whole (the company). However, the duty requiring directors to act in good faith duty also has an objective element. What the director considers as in the best of interest of the company may not be what the court considers to be so ( Advance Bank v FAI Insurance Ltd) It is necessary to consider what a rational director would consider to be in the best interests of the company 21 Cook v Deeks 3 of 4 director/shareholders formed a new company and arranged for the business of the first company to be transferred to the new company They breached their duties to the first company and their attempt to ratify the conduct in breach (as majority shareholders) failed The Court made an order compensating the loss to the first company by imposing a trust arrangement the 3 directors holding the benefit of their breach (the business transferred to the new company) on trust for the first company 22 Duty to act for a proper purpose Directors have extensive powers to run the company, however where they use such power to prejudice groups of shareholders or to secure their own positions they may breach their duty Howard Smith v Ampol - destroy existing majority [2 major shareholders controlled 55% of the shares - bid for further shares and control of the company - directors issued new shares to frustrate bid - the 2 shareholders now reduced to minority interest] Ngurli v McCann - act in self-interest 23 Duty to avoid a conflict of interest Directors fiduciary duties require them to act in the company interests at all times Furs v Tomkies - it will be a breach of duty where directors conduct secret negotiations to the company's detriment Where opportunities arise in the normal course of directors carrying out their role (corporate opportunity) they should not seek to benefit personally, or take the matter further, unless they have disclosed relevant matters to the board Disclosure is essential - Qld Mines v Hudson; and see s 191 24