Law of Business Associations: Company Directors - Case Study Example

Running Head: Company Directors Company Directors Name Course Lecture Date Introduction The directors of a company are conferred with powers to act on behalf of the company1. The power to act on behalf of the company is conferred on individual directors or on the board of directors collectively. As the elected representative of shareholders, each director represents the voice of the shareholder(s) that have elected him director. Decision making in proprietary companies is based on resolutions or the taking of votes. While the presence of directors elected by minority shareholder acts to check the power directors put in place by majority shareholders. In practice, the voices of minority shareholders are drowned by the superior voting numbers of directors representing majority shareholding2. In most case, the opinion of directors representing the minority shareholding is ignored in decision making. Furthermore, directors who represent the majority shareholding breach the duties of directors imposed upon them by the common law and the Corporation Act 2001 (cth); the Act due to their dominance in decision making3. From the facts of the case, two issues related to the control of company by directors arise. First, does a director representing minority shareholding and thus with inferior voting rights have a remedies in common and statutory law if he is sidelined from the company decision making at the board level. Secondly, has Don breached his duty to disclose his material interest in the contract with Myco. Issue one: Does Bryan have any remedy to his apparent sidelining from the companies decision making at board level. Part 2f.1 of the Corporation Act 2001 (cth) deals with oppressive conduct of affairs by the company or its directors. In section 132 (e) a court can make an order against a company if it is “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity”4. According to Brennan J in Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459 at 472 the test for unfairness is “a matter of fact and degree” and involves an objective test5. According to Brennan J, directors have an additional duty to ensure that their decisions are fair to member. This duty is beyond their good faith and diligence duty. In this case, Don uses board tactics to frustrate Bryan opinion in the company’s decision making. He conducts the company’s affairs in an overbearing manner. He is also known to hold consultative meeting before the main board meetings with the directors he has appointed. In these meeting the directors adopt a common stand that is opposed to Bryan’s and later impose the decision on Bryan through voting. Don does not also allow Bryan enough time to talk when the board of directors meets. Similarly, in John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors 6 ACSR 63 a series of incidents involving board meetings were recognized as oppressive conduct6. Similar to Bryan, the Applicant in the case held a minority shareholding of 21 per cent in the company, while the other two defendants held 63 per cent shareholding. The defendant conducted the affairs of the company in an overbearing manner. According to the Plaintiff, Mr. R run the company as though it was his own and regarded minority shareholder as a nuisance. The plaintiff also raised a complaint that the affairs of the company were being run with little regard to the views of other directors, the same complaint Bryan raised against Don. A number of principles set out in the case are relevant to our case7: One, of these principle states that a director’s who is a representative of majority control is liable of oppressive conduct if he exercises his voting right in a way it interferes with “the right of members to have the company affairs conducted according to the company constitution”. Where such a right is not deprived, exercise of voting power by the majority cannot be regarded as oppressive conduct. Oppression is something done against a person's will; it must result from some "overbearing act or attitude on the part of the oppressor"8. Conclusion Don board tactics can thus be concluded to be oppressive conduct as defined in the Starr case. In this case Bryan can access remedies set out by Corporation Act 2001 (cth) section 233 which states that a court can make an order9; (a) that the company be wound up; (b) For the constitution of the company to be modified or replaced. (c) To regulate the corporate affairs of the company in the future; (d) “for the purchase of shares with an appropriate reduction of the company's share capital”10; (e) “for the company to institute, prosecute, defend or discontinue specified proceedings”11; (f) “ authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company”12; (g) “appointing a receiver or a receiver and manager of any or all of the company's property”13; (h) “restraining a person from engaging in specified conduct or from doing a specified act”14; (i) “requiring a person to do a specified act15” Issue two: has Don breached his duty to disclose where his personal interest and those of the company conflict Directors of companies have a fiduciary and statutory obligation to make full disclosures about matters where their individual interests conflict with those of the company16. According to Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461 this is a strict liability duty17. This duty is set out in section 191 (1) states that “a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise”18. The aim of this clause is to prevent the director from engaging the company in transactions where their own interests take precedent over those of the company. Secondly, it prevents directors gaining unfair profits due to their position as directors of the company. Under Section 184 (2) it is a criminal offence for a director of a company to use their position dishonestly to gain “an advantage for themselves, someone else or cause detriment to the corporation”19. While under section 182 (2) a similar offence attracts a civil penalty20. As set out by Section 195 a directors who has a material interest in a matter is not allowed to vote on the matter or be present while the matter is being discussed by the other directors21. In common law as seen in Daniels v AWA Ltd (1995) 13 ACLC 614 (CA), a director is charged with a duty to make disclosures of all “shareholdings, debentures, options and contracts and of any changes relating to them as required”22. In ASIC v Adler (2002) 41 ACSR 72 it was ruled that it is not necessary for the director to have accrued an advantage from the undisclosed matter or the company to suffer damage for it to constitute an offence23. In the case, Don has awarded Myco a three year supply contract without discussing the matter with the other Directors of Coco. Myco is an Australian company that imports diamonds from Israel and South Africa. Don has an interest in Myco where he holds 20 per cent shareholding. It can be concluded that any profits that will be made by Myco from the contract will pass on to Don as one of its shareholders. Therefore Don Shareholding in Myco constitutes material interest as referred to by section 191 (1) of the Corporation act24. As set out, in Daniels v AWA Ltd, Don failed to make disclosure regarding all contracts as is required of directors while entering into transactions with outsiders25. Furthermore, Don is liable for a civil offence as the move to award the contract to Myco where he is shareholder contravenes section 182 (2)26. It is apparent that Don abused his position as director of Coco, to gain an advantage for himself. Don’s actions were also intentionally dishonest, meaning his conduct attracts criminal liability. In deciding whether he committed an offence, it is inconsequential whether that contract caused detriment to Coco or whether Don will make a profit from the contract27. The fact that Don disclosure the transaction or his interest suffices as a breach of his duty of disclosure. To avoid criminal and civil liability in this case, Don should have informed the other directors of his shareholding in Myco. Then the other directors would have proceeded to deliberate and vote on the matter in the absence of Don28. However, this never happened meaning Don cannot escape liability as he failed to disclose material interest in the Myco contract. Conclusion Therefore, the Bryan can institute and succeed in criminal and civil proceedings against Don for his breach of the statutory duty of disclosure under section 182, 184 and 191. The above mentioned sections are incorporated in the Australian corporation law to check the powers of the directors while acting on behalf of their companies. Directors are thus discouraged from engaging in contracts that cause detriment to the company and its shareholders while benefiting the directors own selfish interests. Bibliography A. Articles/Books/ Reports Howson, Nicholas, When'Good'Corporate Governance Makes' Bad'(Financial) Firms: The Global Crisis and the Limits of Private Law,’ (2009) 108 Michigan Law Review, First Impressions 108 44. Paul Redmond, Companies and Securities Law commentary and Materials, Thomson, Reuters, 2009 Tomasic, Roman, Stephen Bottomley, and Rob McQueen, ‘Corporation Law in Australia’ (The Federation Press, 2002) B. Cases Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461 ASIC v Adler (2002) 41 ACSR 72 Daniels v AWA Ltd (1995) 13 ACLC 614 (CA)) John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors 6 ACSR 63 Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459 at 472 C. Legislation The Corporation Act 2001 (cth) Read More