Corporations Law: Directors Duties - Assignment Example

Corporations Law: Director’s Duties Name Institution Name Course Name and Code Date A company is a completely independent entity, and regulations and rules exist in determining the manner in which the business is operated. For example, the shareholders provide the investment while the same shareholders elect directors to guide the business in achieving its goals and objectives. The directors are supposed to follow the views of the shareholders and other legal requirements. Flyaway operates chartered flights, but the business faced operational challenges, and the “directors” decided to take a $10 million loan from Citibank. The decision was made without the inclusion of some directors arguments and also one of the directors was a director in another competing company. To correct the numerous challenges, the shareholders resolved to veto decisions on expansion and the loan facility. Do the shareholders have a right to veto expansion decisions based on the current situation? Have the directors’ breached their director’s duties? According to the corporate law, any decision making in a corporation incorporates a political dimension process since it is based on a dual decision making system. In constitutional term, the decisions can be made by either the shareholders or the directors, or both. However, the shareholders decision made during the general meeting has superior authority compared to the decisions made by the directors. The power is obtained from the Corporate Act 2001 in which the general meeting by the shareholders has the power to ratify the duties of the directors, dismiss the directors or event to amend the constitution1. Moreover, the aspect of decision making through the general meeting should not be seen as a mere procedural hurdle or a rubber stamp but an integral component in championing the requirements of the corporation and the needs of the share holders2. Therefore, the shareholders have an upper hand in making decisions compared with the directors. Mary, as a shareholder, and according to the Corporate Act 2001, has the right to call for a meeting and create an environment that enables conducive discussions resulting in proposals or appropriate actions towards the advancement of the requirements of the corporation. Hence, the directors and the shareholders have a right to decision making in fulfilling the requirements of the corporation. Furthermore, the directors should not believe or see their respective role in decision making powers is signing off proposals. The directors are required to exercise their respective powers accordingly3. To strengthen the role and responsibilities of the directors and shareholders, a deliberative decision making approach should be encouraged. Corporate decisions should not be based on the legitimacy of the votes or the whether the outcome would reflect positively on the development of the corporation rather should incorporate the processes that contribute to the formal adoption of the decisions premised on the deliberative input of the different stakeholders4. The deliberative decision making should incorporate open and genuine decision making whether in the general meeting or in the boardrooms. In the current scenario, Peter was absent as usual and did not contribute to the procedural aspect of decision making. Peter was not able to accomplish his respective duties when it comes to procedural aspects in decision making. In common law, Re Compaction Systems Pty Ltd, the judge stated that the members may not attend the meeting, and minority may have their views; however, the important component is not the size or the ideas rather an advancement of arguments during the procure into making the right decisions5. It illustrates that Peter did not present any arguments; therefore, the aspect of rules and responsibilities are not championed. ASIC v Healey & Ors [2011] FCA 717 presents similar arguments on the need for the directors to exercise their duties with a degree of diligence and care6. Peter and John were required to incorporate the aspect of diligence and care before signing any agreements. Hence, both Peter and John have breached their respective director’s duties. According to the Corporate Act 2001, statutory rules and common law, the directors are charged with establishing guidelines, formulation and implementation of decisions, setting goals and deciding on corporate policy. In advancing the directors obligations, the aspect of deliberation is important and their respective presence during the meetings is important7. Paul had a legitimate reason for not attending the meeting because he was sick. In Vrisakis v Australian Securities Commission, one of the judges stated that directors are required to attend all the meetings unless specific situations such as illness prevent8. AWA Ltd v Daniels discusses the importance of attending the meeting and presenting an independent judgment9. In Daniels and Anderson10, the NSW Court noted that the role and responsibilities of directors are to act collectively in managing the corporation. Therefore, the common law illustrates numerous examples of approach in which directors have to undertake to accomplish their respective duties in decision making. Therefore, John called a meeting and decides to make decisions without the judgment of other members11. The lack of attendance by Peter is not a right to make ‘personal’ decisions since John was alone during the deliberations. The shareholders have the right to stop any strategic decision based on an agreement reached during deliberations and meetings12. It is imperative to note that the shareholders do not owe fiduciary duties to the company. However, limitations and directions exist in during deliberations and decisions made during these deliberations should not be used to rubber stamp decisions. For example in Pender v Lushington, Jessel MR stated that the shareholder has a right to vote from promptings or motives premised on individual interest13. Decisions made by the shareholders should be beneficial to the corporation. In Gambotto v WCP Ltd 14stated the importance of excising for a proper purpose in arriving at any strategic decision in the management of corporations. These common laws indicate the role the shareholders employ in protecting their investments. Therefore, Mary and other shareholders had the right to veto or approve any development requirement. In disapproving the investment and expansion strategy, the shareholders were within the constitutional right in deciding the direction of the company. Expansion of a business is a major strategic issue, which from the beginning should have involved the shareholders. However, the directors skipped the aspect and made independent decisions, which may affect the investments of other shareholders. Hence, the directors have to adhere and follow the directives from the shareholders provided the meeting was constitutional and incorporate deliberative decision making15. John, as other investors has the right to invest in any corporation or business, provided the business is legitimate. In the current position of John as a director, limitations exist when it comes to investment and provision of information. For example, John is a director of both Flyaway and Speed Bullet Pty Ltd. The position in Speed Bullet Pty Ltd was obtained after working as a director at Flyaway. John breached his duty as a director because he is a director of a competing entity and may use information from Flyaway to benefit Speed Bullet Pty Ltd. The directors are required to present information regarding their duties in advancing the requirements of the corporation. Section 182 of the Corporations Act 2001, states that the director should not improperly use their position: John used. John gained an advantage due to his position, which is against the same section. The decision that John took can be addressed through a civil case, which may result in civil penalty16. In Section 192, a director is required to inform other directors their respective interest in an establishment that can affect the current business. Based on the section, a director is supposed to give details of the nature and extent of the interest17. John did not present the details and nature of the interest to other stakeholders. John used the position to his advantage and affected the profitability of the Flyaway Corporation. In conclusion, Flyaway directors breached numerous director’s duties and responsibilities. For example, deliberative decision making process should have been encouraged, but information exists in which Peter did not participate in most decision making. Moreover, John did not present his interests in a competing business interest. In addition, to the interest, John may be seen as “taking the loan so that Flyaway is liquidated,” which would be an advantage to Speed Bullet Pty Ltd. Based on the decisions, the directors made, the directors breached their duties. The shareholders have a definite manner in determining the direction of the business. The general meeting and other meetings can be used to determine the direction of the investment. The decision by the shareholders has a higher authority compared to the directors’ decision. Therefore, the directors are required to follow the resolutions passed at the meeting. A civil case arises because of the extent in which the loan facility of $10 million from Citibank was used. References Books Adolfo Paolini, Research Handbook on Directors Duties (Edward Elgar Publishing, 2014) Nickolas James, Business Law, Google eBook (John Wiley & Sons, 2012) Stephen Bottomley, The Constitutional Corporation: Rethinking Corporate Governance (Ashgate Publishing, Ltd., 2013) Cases ASIC v Healey & Ors [2011] FCA 717 AWA Ltd v Daniels Daniels and Anderson Gambotto v WCP Ltd Pender v Lushington Re Compaction Systems Pty Ltd Vrisakis v Australian Securities Commission Legislations Corporate Act 2001 Read More