Director's Duties and Members' Remedies - Case Study Example

Running Head: RETAILER LTD Retailer LTD Name Corse Date Question one According to the case as presented, both Smith and Jones have not fully discharged their duties to Retailer Ltd as part of its directors. This is from both the ethical view, as per the constitution of the company and as per corporations act. Their misconduct should have been avoided. Smith is the Chief Executive of Retailer. Myco Pty Ltd (Myco) is a large private company in which Smith holds 10% of the issued shares. The directors of Myco are Smith’s wife and his brother in law. The tender for supply for the clothing was finally awarded to Myco Pty Ltd. The fact that both Smith and Jones are sitting in the board of directors for Retailer Ltd means that they are part of the directors. They have to play the roles of director. The statutory duties apply to other officers and employees as well. Officers include secretaries, executive officer, receiver, administrator, liquidator, and several other persons. Smith is the executive officer of Retailer Ltd. Therefore, he takes part in management of the company. It is however, difficult to determine what involvement in management means. CCA (Vic) v Bracht [1989] VR 821. It must involve policymaking relating to the company as a whole or a substantial part. The directors of a company have the following duties. First, they have the duty to act bona fide for best interests of the company. This I a common law duty. This means that all the decisions they make and the involvement they put their selves into should have the priorities of the company first and at the heart. In this case, the decision made by the directors was in the interest of the company. This is because they knew it is easier to deal with a company that they knew the directors, and they would therefore, be ascertained of the quality and sustainability of the business. However, in the case of Smith and Jones the decision they made was not at Retailer’s ltd best interest. Smith has 10% shares in Myco Pty ltd. There is therefore, conflict of interest. On the side of Jones, he knew that Myco Pty Ltd has been having financial problems and certainly needed the deal to have a comeback. He did this mainly because he had the interests of his friend (Smith) at heart and not the interests of the company. The second duty of directors of the company is to exercise powers for the proper purpose. The directors of the company have executive powers. They are supposed to use this power for the benefit of the company. As the directors, they board was supposed to make all the considerations and analysis to be able give the tender to the most deserving company. The tender should consider the cost of supply of materials and the future of the company. The directors did not use their powers properly. By the fact that Jones knew that Myco Pty Ltd had financial crisis, he should have informed the board. The third duty of directors is not to fetter discretion. On this duty, the directors did not fully fail. There is no mentioning of incidence of whether the directors did fetter discretion. However, Smith stayed in the meeting during the deliberations until when it was voting time. This does not ensure the company of discretion since smith is a shareholder in the companies contending for the tender. The fourth duty of company directors is to care for the company. To this extent, the directors show care for the company. The directors want to give the tender to a supplier they know and can rely on and will always be the best long-term choice for Retailer Ltd in these situations. However, Smith and Jones do not demonstrate this kind of care. They both know that Myco Pty Ltd has financial problems but still want Retailer ltd to work with it. A supplier with financial problems does not assure the company of a prosperous future The other duty of a director is to avoid conflicts of interest with the company. This is one of the Fiduciary duties of a director. Conflict of interest comes about when any of directors is supposed to choose between two conflicting issues that are mutually exclusive. In this case, Smith is a shareholder in Myco Pty Ltd that is in a financial crisis. As such, they need the tenders to bail themselves out of the problem. On the other hand, he is the chief executive officer of Retailer Ltd, which is awarding the tender. According to the duties of directors, he is supposed to act in the best interest of the company and in this; he fails to avoid the conflict of interest. In addition, certain statutory duties are imposed by (ss 180 - 183), but note that the common law duties remain in existence (s 185) (i) Duty to exercise care and diligence - s 180 (ii) Duty to act in good faith in the best interests of the Company and to use powers for a proper purpose – s 181 (iii) Duty not to make improper use of position in such a way as to gain advantage for themselves or anyone-else, or to harm the company – s 182 (iv) Duty not to make improper use of corporate information to make gain for themselves or any other person or to harm the company - s 183 (v) To avoid conflict of interest (vi) To retain discretion A director also cannot sit on the boards of competing companies because he or she obviously cannot use or disclose information about one Co in their capacity as director of the other. In this case, Smith did not violate this law but the fact that he is a shareholder in the supplying company and the fact that his wife and brother in-law are directors in the company brings about reasonable doubt. Under s 191(1), a D who has such an interest must make disclosure to the Board when such an interest arises, subject to the exclusions in s 191(2). Standing notice may be given under s 192 – for instance, where the Company regularly contracts with an entity in which the Director has an interest. Smith should have therefore, informed the other board members of his interests in Myco Pty Ltd. This would have been the proper thing to do under the circumstance, and he therefore, did not fulfill his role as the chief executive. Question two There are particular legal provisions under the corporations’ act that the board of directors should have complied to. There are the basic requirements of the government towards companies. Under a director’s fiduciary duties, he must act in the best interests of the Co as a whole. Although the duty simply requires a director to genuinely, believe that they are acting in the best interests of the company, which does not mean that the duty is wholly subjective. A Dir may be liable for Board’s improper use of a power if he knew of the other D’s act and yet failed to intervene for example, in the case of Permanent Building Society Ltd v Wheeler (1994) 12 ACLC 674, the board authorized the purchase of land at over-value – the motive was to provide the vendor with $ to meet obligations to other Co’s of which board members were also D’s. These D’s plus the one who failed to intervene was found to have breached a duty. In the Retailer Ltd case, Jones knows of the financial trouble that Myco Pty ltd is in yet still supports giving them a tender this is misguiding the company’s board. In Vrisakis v ASC (1993) 11 ACSR 162 it is clearly stipulated that a director should attend all meetings unless exceptional circumstances prohibited them from doing so, and see also s 300(10) which requires that in the case of public companies the directors’ report must state how many meetings each director attended. Smith should not have been allowed by law to attend the meeting. He however, still attended the meeting and only got out during the time for voting. The corporations act also state that a director is restricted in relation to voting on contracts in which he has a material interest. In the case of public Co’s, s 195(1) prohibits directors from voting or being present when matters, which would need disclosure under s 191, are considered. The Board may however, vote to permit the director to vote - s 195(2). Provision exists for general meeting (under s 195(4)) or ASIC s 195(3)) to grant permission to vote if a quorum of the Board cannot be mustered. Failure to comply with s 195 does not invalidate any transaction – see s 195(5) but is a breach of the Corporations Act by the director. Smith and the directors also violated the act in this case. As much as he did not vote, his presence at the meeting and that of his close friends brings about reasonable doubt on their intentions on matters pertaining to the tendering process. Before the final vote is taken, Smith does not formally state to the board the details of his shareholding in Myco Pty Ltd. However, most directors of Retailer are already aware from previous occasions that Smith is a shareholder in Myco. They also know that he is not a director of that company. From a statutory point of view, such a breach of the fiduciary duty may involve a contravention of s 181 (duty to act in good faith), s 183 (improper use of information) AND s 182 (improper use of position). This is also in violation of the Corporations Act that should be clearly abided to. The Fiduciary duty not to misuse company information will often overlap with the corporate opportunity rule. Section 183 is this aspect of the fiduciary duty in statutory form. A director may misuse company information when trading in its shares, in which case the insider trading provisions is also relevant in this case. Question three In the realization by a shareholder that due process was not followed in the tendering process, there are various remedies or solutions that the shareholder can lean to. Standing to bring the action is conferred upon members, former members or a person entitled to be registered as a member, or an officer or former officer. Note distinction; shareholder becomes member when name entered on books. The first remedy is by a judicial process by which a right is enforced or infringement of a right is redressed. The shareholder has all rights to go to court in case any of these rights are violated as he or she is part of the company. The judicial remedy has various fundamental mechanisms of shareholder protection. These mechanisms protect the shareholder from dubious actions by the directors. Members of a company have individual rights as members and as shareholders. Under the Common law, the members may take action to remedy infringement of shareholder’s individual rights or the rights of the company. S 140 - A shareholder may bring an individual action in the contract to enforce the contractual rights arising out of the const. The Statutory remedies provide members with various rights. S 246D (1) – provides for the protection of class rights, it allows a member to bring an injunction to restrain breaches of the CA (most importantly, breaches of (ss 180-184) under s 1324, it gives rights to inspect books – s 247D, protects from statutory derivative action – s 236, provides a Remedy for oppression - s 232, seek a Winding up of the company - s 461 (f), (g) and (k) Remedies seek to balance interests of shareholders and management. In theory, shareholders can remove directors, but in practice in large companies, it is difficult to muster shareholder majorities. Where harm is being done to the company by the majority, the minority can bring a statutory derivative action on behalf of the company – s 236(1). This can be either to commence or intervene in proceedings to which the company is a party. The types of actions that a shareholder can take are classified into three. First are the personal actions. These in a case where an individual shareholder sues on behalf of his/herself where some personal rights have been infringed. This mainly deals with issues to do with shares and personal rights. The second type is the representative action also known as the class action. In this type, the individual shareholders are allowed by law to sue the directors or the company on behalf of themselves and other shareholders who have suffered the same damage. This is in reference to multiple personal actions, which is also right to all the shareholders o the company. The sue may be against the directors for not fulfilling their duties as stipulated by the corporations Act. The third type is by derivative actions. These are actions taken y the shareholder on behalf of the company. This is when the rights of the company are infringed whether by the directors or anyone else. In this case, the shareholder may go to the judiciary for a lawsuit in all the three occasions. There are also other exceptions where members could sue on behalf of the company. These exceptions vary depending on occasion but involve the following cases. First a shareholder can sue on behalf of the company where the transaction was ultra vies or illegal (s125). In this case, the transaction was not illegal but was based to the favor of the involved person. The interest of the company was not given the first priority as the company lost money. The second instance is where there is inadequate ratification. In such instances, the transaction required the sanction of a special majority. If this requirement is not complied with, the shareholder can sue on behalf of the company. The vote was subjected to the majority of the directors who were also misinformed. The other instance where the shareholder can sue is when their personal rights have been infringed. The rights of the shareholder include being given the first priority in the board decision. In this case, the board of directors of Retailer Ltd did not act with care especial the chief executive, Smith and his long time friend Jones. When there is fraud against the minority, a shareholder can also sue on behalf of the company. In this case, the rule was not broken. Daniels v Daniels [1978] 2 WLR 73 – here the directors controlling the company sold an asset to one of them at undervalue. After the sale, the director on resale then made a enormous profit. The minority shareholders were entitled to bring an action against directors and company to recover the director’s profit. The duty of care is qualified by the business judgment rule contained in s 180(2). It operates in relation to the duty of care and diligence as it exists under both the Corporations Law and the common law. The tender was worth a lot of money that could actually bail out Myco Pty ltd. As such, the chief executive made a massive profit while at the same time costing the company time and money. The money should not have been wasted by given the tender to another competitive company. The Directors’ fiduciary duty extends to situations other than those in which the director or a related party is contracting with the company. The requirement that there be no conflict of interest also applies where the director uses his position in the company for his own benefit. This applies whether the company is harmed or not. As such, the shareholder can take the board to court for the necessary action to be taken. In this case, Smith the chief executive did not state where the conflict of interest was arising. He was thus liable to a suit. A company may sue directors in court for deceit. This is when the director has been fraudulent. In addition, the directors can be sued for negligence where the director has been careless. Being part of the company, the shareholder can also sue anyone knowingly involved in such a breach (see s 79, Green v Bestobell Industries). In this case, both Smith and Jones have failed to comply with the law. Jones has been careless by leading the other directors to believe that Myco Tyl ltd could satisfactorily deal with the tender. Smith on the other hand, has been fraudulent by letting Retailer ltd, a company in which he is executive to give a tender to another company which is less deserving only because he has 10% of shares in it. A company may obtain equitable compensation from an officer who breaches his fiduciary duty (such as damages, to place the plaintiff in the same position as if there had been no breach, this includes interest where the breach of fiduciary duty has involved a loss to the company). In this case, the directors are liable to the loss of the company and therefore, they have to properly compensate the shareholders. As such, the shareholder can take this as a remedy. Where a director has misapplied company property or funds, the property or funds or proceeds from the sale may be recovered because he is constructive trustee for the company. Property will be recoverable from third parties who had actual or constructive knowledge of the company’s interests, but parties who received a bona fide and without notice will defeat the Co’s claim (ss 129 and 128(2)). The same rule applies in relation to transactions such as improper exercises of power (eg as in Howard Smith v Ampol) – such a transaction may be reversed subject to the rights of third parties. In such a case, the tender will be terminated to protect the company from making further loses. It should however, be noted that a court may grant relief from liability in any civil proceedings for breach of duty, provided that the director acted honestly and ought fairly to be excused – s 1318. A company can also obtain a general law injunction to prevent a breach of fiduciary duties or for breach of the company’s constitution. In this case, both the constitution of the company and the corporations act were violated by the directors. Read More