Australian Corporations Law - Research Paper Example

?Opinion Law Firm Re: Minority Shareholders of ArrowCar Ltd. Background: The firm represents the minority shareholders of Arrowcar Ltd. whohold 45 per cent of the shares in ArrowCar. The 45 per cent shareholders seek advice on the arbitrary acts by the majority shareholders, who have adopted a policy that advances environmentally safe cars rather than the maximisation of profits. In doing so, the majority shareholders have advanced $20 million to a Vietnamese subsidiary in breach of their duties as directors of the company. Ultimately, the minority shareholders seek advice on whether or not they can obtain court orders directing the payment of higher dividends and a declaration that the majority shareholders have breached their duties in financing the subsidiary. Legal Issues: The issue relative to the decision to limit shareholders’ dividend by the majority shareholders who sit on the board of directors raises the question of corporate social responsibility and how that impacts directors’ duties. Corporate social responsibility dictates the extent to which directors should take account of all stakeholder interest including non-shareholders. The issue relative to the $20 million investment in the subsidiary and tripling the wages of assembly wages in the Vietnam subsidiary raises questions pertaining to the extent to which directors’ duty toward the company’s best interest is breached by such an investment. If the payment is considered gratuitous it will not be considered in the best interest of the company. Another issue is whether or not the minority shareholders can take derivative action against the directors for the company. Each of these issues are considered below. A. Corporate Social Responsibility Corporate social is not specifically provided for in Australian company legislation. The Australian Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) 2006 states that Australia’s primary company statute allows “directors to have regard to the interests of stakeholders other than shareholders” and as a result the current legislation does not need to be amended to specifically provide for it.1 For this purpose, non-shareholder stakeholders are employees, creditors, clients, the industry and the impact of company decisions and products on the “surrounding social and natural environment”, the state and the wider community.2 By virtue of the common law and Section 181 of the Corporations Act 2001, directors have a fiduciary duty to act in the best interest of the company.3 The main question is whether or not the best interest of the company includes the interest of non-shareholder stakeholders. Some guidance can be found in the common law. The investment of the $20 million in the Vietnamese subsidiary is considered by reference to Parke v Daily News Ltd. In this case, the company attempted to pass a resolution permitting the payment of benefits to former employees of the company. It was ruled that the proposed payment was entirely gratuitous and therefore ultra vires the company’s objectives.4 Similarly in Re Lee, Behrens and Co. Ltd the court held that the payment of an annual pension to a former director’s widow, was: Expenditure of the company’s money and that money can only be spent for the purposes reasonably incidental to carrying on of the company’s business.5 Eve J. devised a test by which to determine whether an expenditure or investment was in the company’s best interest. First, it must be ascertained that the transaction was “reasonably incidental to the carrying on of the company’s business.”6 Secondly, the transaction must be bona fide and thirdly, it must be done for the “benefit and to promote the prosperity of the company.”7 Although the cases cited above are English, they have been used by the Australian judiciary. For example in Woolworths v Kelly, Mahoney JA stated that: A company may decide to be generous with those with whom it deals. But I – put the matter in general terms – it may be generous or do more than it need only if, essentially, it be for the benefit of or for the purposes of the company that it do so.8 What can be gleaned from the authorities cited is that directors have a wide discretion and this is precisely why they are required to act bona fide and in the best interest of the company. Ultimately the best interest of the company means that directors’ conduct and transactions must ultimately benefit the company. After all, directors are dealing with corporate funds. It is not theirs to with as they please. The Senate Standing Committee on Legal and Constitutional Affairs commented in 1989 that directors’ duties to take account of outside interests only to the extent that it benefits or protects the interest of the company.9 The Senate Committee also stated that the objective of imposing duties on directors and setting standards for the conduct of those duties is: To protect people (such as shareholders) who entrust their interests to the care of others (such as directors). 10 In this regard, Section 182 of the Corporations Act 2001 is instructive. Section 182 provides that directors are not at liberty to use their respective positions to: (a) Gain an advantage for themselves or someone else; or (b) Cause detriment to the corporation.11 It is obvious that the company was formed for the purpose of making a profit from the manufacturing of petrol powered cars. It is based on this objective that the minority shareholders invested in the company. The decision to limit dividends and to invest in a far less profitable car is inconsistent with the company’s objectives and also detrimental to the corporation. As such the decision of the two directors and the majority shareholders is contrary to Section 182 of the Corporations Act 2001. Moreover it is generally agreed that the duty to protect or safeguard the interest of the company means safeguarding the interest of the shareholders. To this end, it has been argued that this also means not only taking account of current shareholders, but also the interests of those who may become shareholders in the future.12 By implication this means that directors must act in a way calculated to maximize company profits so that the company continues to remain in business for the benefit of future shareholders as well as current shareholders. Obviously, the interest of other stakeholders will factor in, provided it does not compromise the continuation of the company’s well-being.13 It therefore follows that ArrowCar’s directors, as fiduciaries are duty-bound to first and foremost, look after the interest of its shareholders. In doing so, they are required to not only consider the interest of the current shareholders, but also the interest of future shareholders. This means using their best endeavours to ensure that the company continues to prosper. At the same time however, corporate directors may take account of other stakeholders, but not do so in such a way as to compromise the company’s continued well-being. There are laws directing companies and all natural persons to be environmentally conscious that function outside of company law. Similarly, Section 180 of the Corporations Act 2001 ensures that companies act with due diligence and are not negligent.14 Therefore there are variety of ways that the directors of ArrowCar can manage risks without compromising the company’s profits and shareholder dividends. In all the circumstances the minority shareholders have a case against the two sister directors for breach of directors’ duties in that they are not acting in the best interest of the company and are essentially making gratuitous payments that compromises the company’s continued wellbeing. Since the directors are acting in a manner inconsistent with Sections 180, 181 and 182 of the Corporations Act 2001, they are not acting in the interest of the company. It makes sense that if the directors are contravening any statute they are not acting in the company’s best interest. B. Derivative Claims Minority shareholders have a variety of options available to them in respect of directors who act oppressively or unfairly.15 Section 232 provides that the court may make an order pursuant to Section 233 of the Corporations Act 2001 when “the conduct of a company’s affairs” or “an actual or proposed act or omission by or on behalf of a company” or “a resolution, or proposed resolution” is “contrary to the interests of the members as a whole” or “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members” .16 Section 233 confers upon the courts the authority to make a number of orders including the orders that the minority shareholders request. Section 233 (j) confers upon the court the authority to order “a person to do a specified act”.17 Therefore an order can be made requiring the dividends be improved on the grounds that the limitations on the dividends are oppressive or unfairly prejudicial to the members of ArrowCar. Likewise an order can be made pursuant to Section 233 (i) “restraining” the sisters “from engaging in specified conduct or from doing a specified act”.18 Section 233(i) therefore permits the minority shareholders to obtain an order requiring the sisters cease their investments in the electric engine in the replacement of the internal combustion model. Since such conduct appears to be inconsistent with Section 180 of the Corporations Act 2001 which requires that the directors act with skill, such conduct is a breach of the director’s duty. Likewise, the payment of the $20 million is also contrary to the company’s best interest, the court can provide declaratory relief declaring that the directors are in breach of their fiduciary duties. As noted above, such an investment is purely gratuitous and therefore a breach of directors’ duties. An application for an order can be made by any member of the company.19 Since shareholders are members of the company, the minority shareholders may commence the action for the relief sought under Section 234 of the Corporations Act 2001. Conclusion Based on the authorities discussed the minority shareholders are advised that the majority shareholders acted in a manner oppressive or unfair to the minority shareholders. In addition the majority shareholders as directors have breached their statutory and common law fiduciary duties. As a result the minority shareholders are at liberty to file a claim for the relief sought pursuant to the Corporations Act 2001. C. Section 172 of the Companies Act 2006 (UK) Section 172 of the Companies Act 2006 (UK) raises the bar in a manner that Section 181 of the Corporations Act 2001 does not. By implication, Section 181 only permits company directors to take stakeholder interest into account while continuing to maintain shareholder primacy. Section 172 however, specifically instructs directors to act in “good faith,” in a manner that promotes the company’s success for its members’ benefit, and “in doing so have regard to”, “the interests of the company’s employees”, “the need to foster the company’s business relationships with suppliers, customers and others”, “the desirability of the company maintaining a reputation for high standards of business conduct” and “the impact of the company’s operations on the community and the environment”.20 Based on Section 172 of the Companies Act 2006 (UK), the opinion would be modified to reflect the compulsory duty requiring directors to take account of the environment, to maintain high standards, to protect its reputation for high standards, to foster its business relationships, to safeguard the interest of its employees and to consider how the company’s operations impact the community and the environment. This would mean that the directors’ decision to triple the wages of its Vietnamese employees are consistent with the corporate social responsibilities expressed in Section 172 of the Companies Act 2006. Moreover, the investment in the electric engine is consistent with the duty to take account of the impact of the company’s operations on the community and the environment. Unlike S. 180 of the Corporations Act 2001, Section 172 of the Companies Act 2006 mandates that UK companies act in a manner that is consistent with stakeholder interests. Therefore under the Companies Act 2006, the directors would not be found to be in breach of their duties as they are only acting in a manner consistent with Section 172 of the 2006 Act. Bibliography Textbooks Clarke, T. International Corporate Governance: A Comparative Approach. (Psychology Press 2007). Latimer, Australian Business Law 2009. 28 Edition, (CCH Australia Limited 2010). Articles/Journals Greenberg, D. ‘Making Corporate Social Responsibility an Everyday Part of the Business of Business: Offering Realistic Options for Regulatory Reform.’ (2007) 19(2) Article 3 Bond Law Review 1-19. Table of Cases Parke v Daily News Ltd [1962] CH 927. Provident International Corporation v International Leasing Corp. Ltd. [1969[ 1 NSWR 424. Re Lee, Behrens and Co. Ltd [1932] 2 Ch 46. Woolworths v Kelly [1991] 22 NSWLR 189. Table of Statutes Companies Act 2006 (UK) Corporations Act 2001 (Australia). Official Government Papers Australian Parliamentary Joint Committee on Corporations and Financial Services 2006. Senate Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, ‘Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors,’ (1989. Read More