Advice to a Group of Shareholders - Case Study Example

Advice to a Group of Shareholders Name Course Name and Code Date Introduction Legal framework provides different mechanisms for registering a business. An example of such a business is a company. A company is seen and operates as a completely independent entity, which is guided by rules and regulations. The company is established by shareholders and gives powers to the directors to manage the business. The directors are required to engage the shareholders in decision making, and also, the directors are required to use their knowledge and experiences in managing the business. Happy Holidays Ltd is a company that operates a successful budget hotel chain. The proposals and decisions of the directors are to diversify the company into operating the casinos. The decision and idea is appropriate, but numerous legal, and fundamental problems exist in the manner the decisions were made and instances of conflict of interest: or hiding crucial information. The directors of the company include Claire and David, no executive directors and Bruce, the chief executive officer and Adriana the managing director. Adriana proposed the numerous strategic diversifications and proposed Consultwise as an advisor even though relationship exists between Consultwise majority owner and Adriana; Bruce does not disclose the financial situation of the company, and Consultwise did not disclose contents of the bidding criteria. Therefore, these different stakeholders played different roles in contributing to the losses of the company. Analysis and Discussion of the Situation The Corporate Act 2011 has specific sections that address the roles and responsibilities of the directors1. Common law and statutory rules exist in which it states the roles of directors including the establishment of guidelines, formulation of strategies and implementation of the strategies2. The directors are required to set goals, determine the steps to be followed in the implementation of the strategies and contingency measures. ASIC v Healey & Ors [2011] FCA 717 defines the role and responsibilities of the directors in fulfilling their integral tasks of managing the organization accordingly3. AWA Ltd v Daniels incorporates the aspects of independent judgment by the directors4. In the current case, the directors may be seen as not advancing independent judgment because the directors did not critique Adriana prepositions and accepted the proposals without questioning. The Daniels and Anderson illustrate the requirement of directors to work collectively in fulfilling their respective roles and responsibilities5. The directors are liable for their actions in a collective approach and decision accepted should not be directed to a single individual but the entire group of the directors6. The directors have breached their roles and responsibilities based on the Corporate Act 2011 and other common law directives. Adriana and Bruce breached their respective roles and responsibilities based on the Corporate Act 20017. Section 182 of the Act presents that the directors should use their positions appropriately while Section 192 of the Act requires directors to disclose their interest in any action or decision affecting the companies they are directing. Adriana – fiduciary duties are imposed on directors to prevent these directors from getting a personal advantage through company resources. Mills v Mills (1938) 60 CLR 150 at 185 addresses the fiduciary duty in which the directors are required to advance the requirements of the company8. However, Adriana used the resources or her knowledge to benefit the owners of Consultwise. The benefit was obtained through the renovation of the home of the majority owner of Consultwise. Phipps v Boardman [1967] 2 AC 46 states that the directors are not required to operate in situations where conflict of interests arises9. Chan v Zacharia (1984) 154 states that directors have to avoid situations where personal conflicts arises10. Adriana may defend herself by stating that she had engaged the directors in arriving at the decision. Moreover, the directors were required to make independent judgments and the directors did not invest in arriving at the conclusion11. Nevertheless, Adriana still has breached her role in fulfilling the roles and expectations of Happy Holidays. Bruce - Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 requires directors to operate in terms of “honesty and trust.”12 Bruce did not work in honesty and trust because he did not disclosure the financial situation of the company. However, the aspect of subjectivity can be questioned. Bruce can use the argument on Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62, stating the decision undertaken was aimed at advancing the requirements of the company as a defense argument13. Nevertheless, the situation regarding Bruce can face additional problems based on the Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405. Bruce was required to inform other stakeholders on the financial position of the company14. Therefore, Bruce breached his role in accomplishing tasks assigned to a director of Happy Holidays. Claire and David are non-executive directors, but the individuals still make decisions for the company. The non-executive directors have fiduciary duties, and the Corporation Act does not make a distinction between executive directors and non-executive directors. The non-executive directors breached their roles and fiduciary duties in ensuring the company operates effectively15. Consultwise hiding information on prospect of winning the bid and also channeling the amount to Fredrick and Adriana home. The Corporation Act 2001 defines the roles and the extent in which companies can use the companies’ finances for personnel benefit. Winning the contract of providing agency services to Happy Holidays is legally right but hiding some information creates additional fiduciary complications. Consultwise knew that the Happy Holidays will not win the bid because of the predefined criteria but still charged the company. It can be seen as a form of stealing and Happy Holidays should sue Consultwise to recover the costs16. The financial challenges that Happy Holidays experiences can be traced to the contract with Consultwise even though other internal processes can be highlighted. Therefore, the Consultwise breached the contract entered with Happy Holidays. Steps to be taken to remove the board members The shareholders are the investors and determine the direction of the company. The shareholder decision making process is through voting and general meetings. Gambotto v WCP Ltd advances the role of the shareholders in strategic decision making for a corporation17. Jessel MR in Pender v Lushington stated that the removal of board members and other decisions are premised on participating in voting to advance the requirements of the corporation18. Section 248 and 249 of Act provides mechanisms and methods of calling for a meeting and provides a mechanism of defining appropriate resolutions. Section 203 of the Act discusses the resignation, retirement and removal of directors19. Hence, numerous directives in the Corporation Act and the common laws provide avenues to the Happy Holidays to remove or change the directors. According to the Corporation Act 2001, the shareholders have the right to begin the removal process. The intention to remove the directors should be given to the company sixty days before the meeting is conducted based on Section 203D (2) of the Act20. The company is then required to call a meeting and a vote taken after three weeks and not more than two months. The company should forward the copy of the notice to the director(s). The director will then present his or her argument during the shareholders meeting and if the director is not satisfied, the director may seek resolution or advice from the courts21. After voting, the director ceases being a director of the company and the shareholders have a right to vote for new directors. Conclusion The role and responsibilities of directors including the fiduciary and deliberative decision taking are contained in the Corporation Act 2001. The four directors did not fulfill their roles and responsibilities in directing Happy Holidays Limited. The directors breached the law and obligations of ensuring Happy Holidays Ltd operates effectively. Moreover, other stakeholders contributed to the worsening of the situation. For example, Consultwise “stole” from the company and used the funds to renovate the directors’ home. The shareholders of the Happy Holiday Ltd have enough legal tools to remove the directors and replace with directors that are able to accomplish the company’s goals and objectives. References Anabtawi, I. and Stout, L., 2008. Fiduciary duties for activist shareholders. Stanford Law Review, pp.1255-1308. ASIC v Healey & Ors [2011] FCA 717 AWA Ltd v Daniels Chan v Zacharia (1984) Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Corporation Act 2001 Daniels and Anderson Esser, I.M. and Du Plessis, J.J., 2007. Stakeholder Debate and Directors' Fiduciary Duties, The. S. Afr. Mercantile LJ, 19, p.346. Hillman, A.J., Nicholson, G. and Shropshire, C., 2008. Directors' multiple identities, identification, and board monitoring and resource provision. Organization Science, 19(3), pp.441-456. Knepper, W.E., Bailey, D.A., Bowman, K.B., Eblin, R.L. and Lane, R.S., 2015. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors. Langevoort, D.C., 2006. Private Litigation to Enforce Fiduciary Duties in Mutual Funds: Derivative Suits, Disinterested Directors and the Ideology of Investor Sovereignty. ECGI-Law Working Paper, (61). Lee, R., 2006. Fiduciary duty without equity: fiduciary duties of directors under the revised company law of the PRC. Va. J. Int'l L., 47, p.897. Phipps v Boardman [1967] Statewide Tobacco Services Ltd v Morley (1990) Whitehouse v Carlton Hotel Pty Ltd (1987) Read More