Corporation Law: The Duties of Directors - Case Study Example

CORPORATION LAW By The of the The of the School The and where it is locatedThe Date Corporation Law It is usually imperative to understand the definition of a director together with the roles that he/she plays in the company. A company director is an individual who serves in a board of a company. The director has a number of duties, which include: Establishing the company’s tactical goals and plans Monitoring the developments made to attain the goals and plans set out Hiring high-ranking management Accounting for the corporation’s undertakings to important signatories, for instance the shareholders The directors are mostly in charge of managing the corporation. To this effect, they are allowed to use every power conferred to them by the company. In Australia, the regulations that oversee the duties and responsibilities of directors are deduced from common law, statute law and the company’s constitution (Price Waterhouse Coopers, 2011, p. 67). The duties of directors in the Australian context have been crafted to enhance decent governance. Moreover, they are meant to make sure those directors actions are in line with the interests of the corporation. That is, placing the corporation’s interests before theirs. It is important to note that the members of the board report to the chairperson of the board of directors. According to the Australian Common laws and statute laws, the following are the prescribed duties of directors. The duty to act bona fide (in good faith) and in the best interests of the corporation (Price Waterhouse Coopers, 2011, p. 68) Duty to desist from pursuing an inappropriate purpose Duties of care and diligence Duty to evade conflicts of interest Duty not to use authority in an inappropriate manner (Corporations Act, s232) Duty not to use of information for the wrongful reasons Duty to avoid conducting trade during insolvency It is important to note that the director of a corporation is bound by a fiduciary relationship with the corporation. This fiduciary relationship creates a number of legal compulsions which constitute a share of the directors customary responsibilities. The fiduciarys legal duties arise from the person’s level of trust (Australian Government Publishing Service, 1989, p. 6). It is important to understand the concept of fiduciary law. It is guided by the perception that an individual (the fiduciary) has a unique situation where he has the authority and ability of influencing the welfare of another (the beneficiary). This, however, is applicable in situations where the beneficiary is of the opinion that the authority and ability vested on the fiduciary will be employed to match the beneficiarys interest. The overall purpose of fiduciary law is to guarantee proper use of the authority and capability vested in the fiduciary (Finn, 1987, p. 13). This is to prevent the individual from promoting any other agenda that is not the beneficiary’s, that is, the companys agenda. The fiduciary relationship is mirrored in dualistic discrete sets of guidelines. The first approach looks at the method that the authorities and decisions have been implemented by the fiduciary. The approach is gives specific importance to the method of decision-making, the correctness of decisions made. It is intended to make certain that in the event that the fiduciary makes a decision vested in his/her fiduciary powers, he/she considers the interests of the beneficiary. The second approach looks at the standard behavior that a fiduciary is expected to have and the categories of conduct that amounts to disloyalty. In this approach, emphasis is not put on the decency of the decision rather attention is on the decency of the behavior of the fiduciary. This is intended to guarantee a high degree of loyalty by the fiduciary to the beneficiary. As such, the fiduciary should desist from pursuing agendas that are in conflict with the fiduciary obligation. Moreover, they must not use their influence to attain individual benefit, without a well-versed agreement by the beneficiary (Finn, 1977). A review of these duties is imperative in answering the case studies in this paper. Question One a. Have Apollo and Rocky Breached Their Directors Duties The fundamental duty that plays out in this scenario is the Duty of care. This is the duty to pay attention and to endeavor to arrive at decent decisions (Black, 2011, p. 9). This requires them to make sensible decisions that are not rush and that will ultimately improve shareholders’ interests. It is imperative to note that the directors do not have to be extremely competent in the subject matter that is beforehand during decision-making. Despite results from the survey indicating that the wells had low gold deposit levels, Apollo and Rocky disregard this advice and proceed to sink in investors capital in the exploration activities. The exploration does not bare any returns subsequently sinking the entire company’s capital. The decision by Apollo and Rocky to continue with exploration is irrational and fundamentally breaches the duty of care they owe the shareholders as directors. b. Do Apollo And Rocky Have an Arguable Defense Given the evidence presented by the geological survey commissioned by the company, there was no commercial value in the gold deposits attained from the sites. Moreover, the company had already used $5 million prior to any discovery. Rocky and Apollo argue that the company is on the verge of a major breakthrough despite the results of the survey stating otherwise. In this regard, they do not have an arguable defense. c. Has Clubber, as the Companys Chair, Breached any Duties? As the chair, other directors are answerable to him. Clubber has the prerogative to overturn a decision that seems to contravene the best interests of the company. Clubber has a duty to desist from pursuing an inappropriate cause. The cause proposed by Apollo and Rocky was inappropriate given the evidence against the same. Moreover, Clubber owes the duty of care and diligence to its investors. He however does not take into advisement the results of the survey and does not act diligently in allowing the project to go on. d. Advise whether Drago as the Companys Chief Financial Officer, breached any Duties The business decisions made by the directors are usually considered decisions of the board as opposed to the individual. In this context, the circumstance that exposes Drago to individual liability concerning the issue of financial judgment is specifically considered. It is imperative to note that in order to establish individual liability, specific connection between the entitys actions and/or omissions and the harm caused to the company should be established. In this regard, Drago was well aware of the financial harm the project had on the company’s finances given the historical financial performance as well as the projected financial performance. All these information was availed by the geological survey at his disposal as the financial advisor. He however disregards these critical information and subsequently allows the project to continue. This is breach of the duty of care and diligence. Importantly, Drago contravened the Business Judgment Rule, which among other requirements, demands that the director must be reasonably convinced that the business judgment advances the best agenda of the firm. As much as the policy of business judgment is meant to inspire innovativeness and risk-taking, in this scenario the odds were stuck against the continuation of the project. Question Two a. Have the directors of Citrus Ltd breached their directors duties This question has been put in context of the directors resolve to advance a loan to Mr. Lang especially concerning their duty to act in good faith and to promote the best interest of their company. In the practice of company law, certain actions will continually be considered inappropriate, even in instances where they appear to improve the success of the corporation (Ford, 1986, p. 34). In a number of instances, some directors were found to have breached their fiduciary duties. They were found acting in a manner that swayed the balance of power in the firm. This was despite the directors’ truthful view that they were acting to secure control of the firm for one group as opposed to the other (Ford, 1986, p. 35). It is important to note that directors should not intentionally inhibit the rights of shareholders in order to create an advantage to one section of shareholders compared to another section of shareholders. This should not be done even as a scheme for promoting the corporations interests. In a similar case (Ring V Rutton), the administrative receiver of a corporation instituted proceedings against a director. The contention was that the director had advanced himself loans from the corporation. The loans happened to be valued at considerably inferior interest rates as compared to the predominant marketable rates. The Supreme Court established that this action was tantamount to contravention of duty by the director. The court subsequently instructed the director to refund the amount lent using the current market rates. In this case, the directors at Citrus purported to advance interest-free loan worth $20 million to Mr. Lang. This was meant to purchase shares in Citrus Ltd so that the share price would considerably escalate. This scenario meant that Anglo Brit would be compelled to offer extra to the Citrus stockholders in case they wanted to take over the company successfully. As much as the directors had the shareholders’ interests at heart, the process of preventing the take-over bid from Anglo Brit was wrong. This is particularly because company law regards certain actions by the directors inappropriate, even in instances where they appear to improve the success of the corporation. This would institute conflict of interest if Lang purchased the shares in his own name. b. Can Anglo Brit Ltd take Legal Action against Citrus Ltd Anglo Brit can only institute legal proceedings against Citrus Ltd if the loan advanced to Lang was used to purchase shares on behalf of the company. In this instance, the company would be purchasing its own shares. In Trevor v Whitworth, it was established that it is unlawful for a corporation to buy its own stocks. In the event that such acquisition was allowed, it would create an incidental decrease in the paid-up capital which is against the legal requirements concerning decrease of capital. If however, the loan advanced to Lang was drawn from a reserve fund that was set up for that purpose, then Anglo Brit does not have legal grounds to start legal proceedings. This is a practice done by companies to raise the market share of its stock. It is important to note that a company can purchase its own shares in a number of other ways that are permitted by law. In retrospect, directors of a company have a number of duties. These are establishing the company’s tactical goals and plans; monitoring the developments made to attain the goals and plans set out; hiring high-ranking management; accounting for the corporation’s undertakings to important signatories, for instance the shareholders. In Australia, the regulations that oversee the duties and responsibilities of directors are deduced from common law, statute law, and the company’s constitution. The duties of directors in the Australian context have been crafted to enhance decent governance. Moreover, they are meant to make sure those directors actions are in line with the interests of the corporation. That is, placing the corporation’s interests before theirs. It is important to note that the director of a corporation is bound by a fiduciary relationship with the corporation. This fiduciary relationship creates a number of legal compulsions which constitute a share of the directors customary responsibilities. The cases reviewed in this section have been analyzed using the concept of fiduciary duties of directors which are very important in understanding the complex relation between directors and the company. List of References Australian Government Publishing Service, 1989. The Parliament of the Commonwealth of Australia Company; Directors Duties; Commonwealth Government Printer, Canberra Black, B., 2001. The Principal Fiduciary Duties of Boards of Directors. Companies Code, s66 (5) (Corporations Act, s383 (5) Finn, P., 1987. Equity and Commercial Relationships, law Book Co Ltd, Sydney, pp. 120-36 Finn, P.0, 1977. Fiduciary Obligations, Law Book Co Ltd, Sydney, pp. 231-300 Ford, H., 1986. Principles of Company Law (4th ed) Butterworths, Sydney, pp. 384-450 Price Waterhouse Coopers, 2011. A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia. Read More