Breached Duties by Directors of Builders Hardware - Case Study Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: INTRODUCTION Corporate governance is always considered back born of the success of any company. Therefore, there is greater interest to oversee how organization is governed by board of directors in order to avoid issues of inefficiency in management. Directors of the company are therefore, expected to have fiduciary obligation in running of the organization (Harris, 2013). That is ensure that they are running organization for the benefit of the shareholder and there interest will come thereafter. Directors are expected to act in good faith by putting interest of the shareholders ahead, exercise due care in carrying out organizational duties and use their powers well in the organization (Harris, 2013). In order to protect shareholders, there are act in corporate law 2001 that stipulates directors’ duties and responsibilities in corporate governance. This duties and responsibilities acts as work contract for the directors therefore, failure to observe any of this acts will lead to breach of duty by directors to the shareholders who appointed them to run the organization on their behalf. It compels the director to act bona fide in the interests of the shareholders, not to act for wrong purpose, to take care and diligence in discharging their duties, to retain prudence, to avoid conflicts of interest in the organization (or declare their conflict of interest),not to disclose confidential information of the organization without consent of relevant authorities and lastly, not to abuse organization opportunities that comes in the course of business operation for example taking commission from a tender awarded to another company without disclosing it (Fisher, Anderson & Dickfos, 2009). According to the case scenario provided for the Builders hardware, H import hardware and Powertools Ltd illustrates fully on the breach of most of the common laws of directors duties by Builders Company. The faults on corporate governance started right after H imports negotiated tender with Powertools Ltd then when Powertools Ltd purchased majority shares in Builders hardware and lastly, when directors put in place anti-takeover mechanisms to prevent Powertools Ltd from taking over operations of Builders hardware with aim of maximizing shareholder wealth which is objective of every board of governance of any company (Fisher, Anderson & Dickfos, 2009). BREACHED DUTIES BY DIRECTORS OF BUILDERS HARDWARE Failure of Builders Hardware directors to act bona fide in the interests of the shareholders According to corporate Act 2001, directors are required to act for the good of the organization leaving their interest aside. Directors who act contrary to the law are always considered to have breached their duties to shareholders of the company and they can be prosecuted in court of law (Tomasic, Jackson & Woellner, 2002). Directors are always gauged if they have carried on their duties in good faith by subjecting to honesty or good faith test where they are tested for their subjectivity in making their decision for example if they will think of their own benefit or for the company as a whole (Tomasic, Jackson & Woellner, 2002). In the case scenario provided, Hellen as a director of the Builder hardware failed to act bona fide in the interest of shareholders since she secretly approaches Powertools Ltd and gives them better deal as H imports company since she is the owner thus facing off Builder Hardware from either winning contract or losing in a competitive basis i.e. through a fair tendering process. Therefore, directors of builders breached their duty to act bona fide to the interest of shareholders of the company (Lipton, Herzberg & Welsh, 2014). The instance of Builders anti-takeover mechanism is another breach of duty to act bona fide since they employed anti-takeover strategy of diluting Powertools Ltd ownership not for the benefit of the existing shareholders before 31 December 2003 but to shield themselves from being removed from their management position soon Powertools Ltd take over (Lipton, Herzberg & Welsh, 2014). This is not good for the shareholders since the company is under performing due to inefficient management that Powertools Ltd wants to address thus directors of Builders Hardware have breach of duty to shareholders (Lipton, Herzberg & Welsh, 2014). Builders Hardware directors acting for wrong purpose Directors of any company are always required to act in a way that any normal person in his/her capacity could act if he/she was in the same scenario. That is acting for the right purpose and interest of the company as a whole (Parker et al., 2012). Breach of duty on this part might arise when directors misuse their powers in the organization by either changing voting powers of different class of shareholders or misusing the opportunities of the company for their own purpose (Parker et al., 2012). In our case scenario, we observe directors action for wrong purpose in two perspective i.e. Action of the directors to dilute Powertools Ltd shares was not done for a right purpose for example shielding company from hostile takeover which can destroy shareholder value but in real sense, directors were too selfish to allow takeover to take place in order to improve efficiency of the Builders Hardware thus increase of shareholder value which is key objective of very organization or shareholders in any organization. Secondly, Hellen secured the tender from Powertools secretly since she had ill intention not to benefit shareholders of Builders Hardware but benefit her own interest. This therefore amounts to breach of duty by Builders Hardware due to failure to act in the right purpose of the organization as required by common law in corporate act 2001 (Parker et al., 2012). Failure to take care and diligence in discharging their duties Directors are always in a position of the organization where they are expected by the corporate act 2001 to monitor and correct different arms of the organization for it proper function (Parker et al., 2012). In order to discharge this obligation, directors are required to get acquitted with knowledge on the operation of the company in order to give a fair judgment on whether certain process are done to standard or below standard and need to be done (Austin & Ramsay, 2012). According to Builders Hardware, we see instance of failure of part of the directors to take care and diligence in discharging their duties since they don’t show their concern on the solvency of the company (Austin & Ramsay, 2012). I can back my assertion with the reason that resolution by the board of directors to issue share to shareholder that existed before 31 December 2003 was voted in by the majority of the directors with the fear that they will lose their positions due to their inefficiencies and protection of their own interest (e.g. Helen) showing that majority of the shareholders didn’t take care and diligence in considering the decision to give Powertools Ltd opportunity to improve company’s operations and shareholder wealth maximization. Thus, directors failed to carry their statutory duty to carry out their duties in due care and diligence. Failure to retain prudence Purpose of having board of directors in any given organization is to maintain high degree of discretion in decision making of the company since having a majority shareholder to make decision for the company might impair (Austin & Ramsay, 2012). For example being in dilemma either to accept or reject certain deal since any decision have negative effect to firm but positive effect on his/her part as an individual or vice versa. Therefore, common law requires one to avoid situation that puts one in dilemma and impair his/her ability to retain his prudence (Austin & Ramsay, 2012). According to Builders Hardware, Hellen placed herself in a position that it impaired her discretion since owning company dealing with similar product line to that in which she is director places her in a difficult situation whether to place H imports interest before Builders Hardware or vice versa. Though it didn’t amount to breach of duty at first since she declared her conflict interest, it impaired her degree of discretion since she might have made the other directors to have shares of Powertools diluted in order to avoid being removed due to the fact that she didn’t disclose her commercial interest to Powertools Ltd when they acquired Builders Hardware shares. Therefore, Builders Hardware directors are liable to breach of duty due to failure to retain their prudence in decision making of the company. Directors having conflicts of interest in the organization Conflict of interest arises when one puts his/her own interest before those of the shareholders of the company as mandated by the Corporate Act 2001 (Redmond, 2009). That requires directors to avoid instance of conflict of interest for example getting a commission from supplier or buyer without disclosing such commission as per the requirement of the law. Another instance is setting up competing business without disclosing your conflict of interest also can lead to breach of duty to the shareholders of the company. Therefore, it is a requirement to disclose his/her conflict of interest to the shareholders before director is given authority to execute his/her duties failure to disclose will lead to breach of duty due to conflict of interest (Redmond, 2009). In our case scenario, Hellen failed to disclose her conflict of interest to Powertools Ltd before and after purchasing majority shares in the company since they are shareholders. Before purchase deal, Builders Hardware should have disclosed such relevant information on conflict of interest to the investor (Powertools Ltd) in order to make informed decision. Abuse of organization opportunities Common law on directors’ duties requires corporate governance not to abuse business opportunities for the organization since it is their mandate to ensure company procures lucrative business deals (Redmond, 2009). In our case scenario, we are able to note that directors (Hellen) misused Builders Hardware opportunities but not giving it chance to competitively obtain tender for supplies to Powertools Ltd instead approached Powertools Ltd secretly. This move of Hellen shows clear indication of misuses of Builders Hardware thus amount to breach of duty by the directors to the shareholders of the company. CONSEQUENCE BUILDERS HARDWARE FOR BREACHING THEIR DUTIES Directors of Builders Hardware can be penalized either through criminal penalty or civil penalty or both. In the case of criminal penalty they will be judged of dishonesty where one will be required to pay fine to maximum of $200,000 or serve jail term of five years and below or both terms can be applied according to schedule 3 of Corporate Act (Harris, 2008). According to Civil penalty addressed in 9.4B of Corporate Act, directors of Builders Hardware might be imposed either or combination of penalty of fine ($200,000), compensate the parties that incurred loss due to the breach of duty or be disqualified from managing any corporation regardless of qualification or company due to the issues of integrity and contravention of the duties accorded to them by law for the protection of shareholders (Harris, 2008). REFERENCE Harris, J. (2013). Australian corporate law. 1st ed. Chatswood: Butterworths. Fisher S, Anderson C, Dickfos. (2009). Corporations Law - Butterworths Tutorial Series, 3rd Edition Butterworths: Sydney. Tomasic,R.,Jackson,J.,Woellner,R.(2002). 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