Conflicts of Interest and Continuous and Periodic Disclosure - Assignment Example

Law: Assignment Question Conflicts of Interest Directors have a fiduciary duty and retain fiduciary relationship with shareholders (who are the real owners of company).1 “Essentially, the relationship requires the individual with the duty to treat the party to whom the duty is owed fairly and in good faith”.2 Based on this description pertaining to the relationship between directors and shareholders, it can be highlighted that the directors do not work in their individual capacity or apply their personal interests and expectations while serving as directors. When they enter into an agency relationship with the shareholders of company, who are the real owners of company, they immediately lose their personal financial or any other type of interests when such interests are compared with the interests and expectations of the shareholders because the shareholders delegate their powers and authority to directors and trust that the directors will preserve their financial interests and put their best efforts for increasing their wealth by taking all necessary measures and steps. Moreover, it is important to mention that directors have their own personal financial and other types of interests while serving as director. In the agency relationship, they (directors) interact with financial institutions for taking loans for their company, with other firms for purchasing and buying raw material and selling finished products to the other companies, with regulators for providing compliance report and other regulatory requirements essential for carrying out business dealings. In all these interactions, the directors develop personal relationships, apart from the business relationship, with the other directors and management of financial institutions and other firms. Under this condition, directors’ level of personal relationship with other firms owners and directors start to become more comprehensive and strong as well in which social gatherings and other informal meetings become a routine for directors. Consequently, this intimacy creates a situation in which the problem of conflicts of interest start to take place in which directors begin to serve their personal interests at the cost of the business interests and expectations of shareholders of the company. According to Companies Act 2001 Section 180, directors have duty of care and diligence along with the rule of business judgement.3 Subsequently, Section 180 (1) enables directors to carry out their duties by using the process of due diligence and degree of care.45 Section 181 describes the essence of relationship between directors and shareholders. In this relationship, the Section maintains that the directors are required to put their best efforts, concentration, time, energy, experience and expertise for entertaining the objectives of company and satisfy the expectations of the shareholders. For satisfying the company objectives, the directors are encouraged to apply the process of duty of care and diligence as well. In this step, certain parameters are highlighted and applied as well. For example, if a director is required to take loan from a financial institution for a period of 10 years and the financial cost (interest) is 8 per cent monthly. After receiving this information, the director must not haste for obtaining the loan but duty of care and due diligence must be applied in which the director must calculate the total financial cost which will be paid annually and at the end of loan period. In addition, the director must contact other two financial institutions and ask for the same information from the financial institutions. Under this condition, the director will be able to compare the annual and total financial cost of loan obtained from these three different financial institutions. Subsequently, the comparison will clearly highlight the lowest and the highest financial cost and this clarity will be highly essential for making cost effective decision. Moreover, even in this type of situation, the possibility of conflict of interest cannot be avoided. For instance, if A financial institution charges 8 per cent financial cost whereas B and C financial institution require 7 and 6 per cent financial cost respectively. Based on this information, C financial institution charges the lowest financial cost and thereby it will be in the best interests of the company to obtain loan from C financial institution. In other words, the director should contact C financial institution and conclude the loan agreement. However, the director decides to enter into a loan agreement with A financial institution which charges the highest financial cost. Later on, certain reports highlight that the director has received a heavy amount of secret commission from the owner of A financial institution. Based on the above information, it can be clearly established that the above situation reflects conflict of interest in which the director did not work to serve the interests of company (shareholders) but only personal interests were entertained at the cost of the company. After this decision, the company paid 2 per cent higher financial cost which could have been avoided and saved as well had the director decided to take the loan from the C financial institution. According to the Section 182, directors are disallowed and discouraged to make inappropriate use of their position.6 This section indirectly elaborates the possibilities of conflicts of interest. Directors are not only trusted by the shareholders (company) but they are also given strategic position (title and authority) in which they are allowed and disallowed to take and not to take certain measures. For example, directors are authorised to make appointment of higher management. If some newly appointed directors form a group within board of directors and they start to lobby their group interests within the board and put their every attempt to select and induct their preferred management employees who does not have relevant qualification and experience as well. At the same time, the group of directors always try to protect and defend the policies and directions which have been adopted and pursued by their ‘favourite staff.’ Consequently, such patronage and inappropriate support for the ‘favourite staff’ depict the conflict of interests and it also represents that the directors have inappropriately used their position for supporting and defending their personal objectives. In addition, they have created an illegal group within the board and that group does not work for the interests of the company but they prefer to preserve the group interests. Consequently, such collusion demonstrates the illegal use of position and tantamount to a severe breach of trust and violation of fiduciary duty as well. In addition, Section 285-318 requires that the directors need to maintain their financial records in a transparent manner for ensuring their integrity.7 It is an established fact that directors have higher repute and strong personal and business relationship with the key officials across the business world. Due to this, they earn attractive earnings and avail a range of financial and non-financial advantages. Since they receive emoluments in millions, this Section requires that the directors should maintain and disclose their financial records by declaring their all earnings so that their commitment and professional integrity are not doubted. Through this disclosure, the company management, shareholders, regulators and other stakeholders will be in a better position to rely on the work of the directors. Question 2: Continuous and Periodic Disclosure Similarities Information Both continuous and periodic disclosures primarily provide information. Different types of information can be provided including financial, non-financial, operational and non-operational and change in the strategic policy or entering into a new business structure or market. For example, in the annual financial report, information pertaining to strategic policies, director’s emoluments is provided; similarly, in the continuous reporting framework, the entities are required to provide similar information, including appointment of new directors and their salaries as well to the regulators, such as Australian Securities & Investments Commission or ASX. Moreover, the purpose of both types of disclosures is to inform and disseminate information to the general public and to the related stakeholders and shareholders as well because by spreading or disclosing the pertinent and important information, the entities are satisfying the provision of transparency and disclosure of the financial and non-activities which have been or are going to be carried out. By disclosing such information, the entities will be able to gain the trust of the related stakeholders and shareholders as well. Material Effect The information provided in both types of disclosures has material effect on the related stakeholders and shareholders. For example, information forwarded to the regulators in continuous disclosure is highly material and important for the regulators as this piece of information enables them to understand the inclusion of new change in policy or appointment of new directors or removal of the current directors. Similarly, in the annual report, which is a form of periodic disclosure, the entity also highlights the same information in which new appointments and tenure completion information of directors are disclosed. As a result, both types of disclosures put material effect on the related stakeholders. Reasonable person Both forms of disclosures are mainly addressed to the interests of reasonable person. Here, the reasonable person can be identified as having direct or indirect interests or stakes in the activities of company. And this person can be a shareholder (for periodic disclosure) or a member of regulatory body (for continuous disclosure). In other words, both disclosures are not maintained and reported to any unrelated person who has no stake in the affairs of the company but they are mainly developed to satisfy the expectations of the reasonable person who can be a shareholder, employee, regulator, stakeholder, community member and so on. Consequently, both periodic and continuous disclosures maintain strong resemblance when it comes to highlight the ultimate users of information. Differences Period Period is the main difference between the continuous and periodic disclosure. For example, periodic disclosure is submitted half-yearly, quarterly and annually as well whereas the continuous disclosure has no such provision and such disclosure can be provided any time of year. For example, the Rule 4.1-4.2C requires the submission of half-year disclosure and annual and quarterly disclosures are needed to be submitted by the rule 4.3-4.7A and 4.7B respectively.89 Listing Rule Separate and different listing rules are applied to the periodic and continuous disclosure. For example, the listing rules, such as 4.1-4.2C, 4.3 and 4.7A, have been mainly developed for the periodic disclosure, governing the type of information to be provided in the half-yearly, quarterly and annual reports of companies. On the other hand, the listing rule of 3.1 and 3.1A, 3.1A.1, 3.1A.2 and 3.1A.3 govern the information inclusion in the continuous disclosure.10 Information Specific and Report Specific The continuous disclosure and periodic disclosure are information specific and report specific respectively. In the continuous disclosure, companies are required to provide material and sensitive information to the regulators whereas quarterly and annual financial reports are provided in the periodic disclosure. Question 3: Case: Smits v Brown [2012] QSC 180 The case was about the ascertainment of partnership debts that had been incurred between partners. Smits, who was the plaintiff, and was the assignee of mortgage debts bought from another firm who already purchased the mortgage debts from the original mortgagor; subsequently, Smits sues Brown for recovery of mortgage debts.11 After that, Brown did not agree with this legal application and contended that the highlighted partnership was ended before to the occurrence of the mentioned partnership debts.12 Principles The court used the Partnership Act 1981 (Qld) s 11, Property Law Act 1974 (Qld) s 199 and Uniform Civil Procedure Rules r 293.13 In addition, the court also considered the previous precedents on the same case which include: “Body Corporate of the Lang Business CTS 5941 v Green [2008] QSC 318, Brown v Ogle [2006] QSC 74, C G Maloney Pty v Noon [2011] NSWCA 397, Deputy Commissioner of Taxation v Salcedo [2005] QSC 227; [2005] 2 Qd R 232, Jackson v Goldsmith [1950] HCA 22; (1950) 81 CLR 446, Jessup v lawyers Private Mortgages Ltd [2006] QSC 3, Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589, Tomas v Balanced Securities Limited [2011] QSC 258”.14 Opinion The Supreme Court has rightly dispensed the justice. Based on the information provided by the facts, it can be mentioned that the partnership act requires that the partners’ liabilities relating to the partnership dealings and agreements on their behalf by the partners are only limited to the existence of partnership. As soon as the partnership agreement is terminated, the related obligations and liabilities will also be revoked and the partners will not be liable after the date of partnership agreement revocation. In addition, the verdict has also been supported by the precedents set earlier by the similar cases in which the other apex courts had given the similar verdict. In addition, while hearing the case proceedings, the court did not only rely on the use of the provisions of the partnership act, but also availed the application of r 293 Uniform Civil Procedure Rules 1999 (Qld). At the same time, the court also adopted almost 6 to 8 similar cases, their proceedings and subsequent verdicts for ascertaining and establishing the facts and final order on the case. Bibliography A Books/Articles/Reports ASX Listing Rules, Continuous Disclosure (ASX Limited, 2014) 301-315 ASX Listing Rules, Continuous Disclosure (ASX Limited, 2014) 401-412 Australian Securities & Investments Commission, Directors and Financial Reporting (Australian Securities & Investments Commission, 2014) 1-5 Friedman, Scott E, How to Profit by Forming Your Own Limited Liability Company (Upstart Publishing Company, 1996) PwC, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia, (PwC, 2011) 301-399 B Cases Smits v Brown [2012] QSC 180 (22 June 2012) Read More