Advice to the New Directors of Juices Ltd - Assignment Example

Australian Corporate Law Name: Institution: Australian Corporate Law Advise the new directors of Juices Ltd whether its former directors breached any of their duties in relation to the decision to purchase the business from FJC Pty Ltd Generally, directors of companies owe three duties to their companies. They are supposed to act lawfully, carefully and loyally.1 The duty of care applies to all decisions that the directors make, and the decisions they are supposed to make should they be exercising ordinary care (House of Representatives, 2001). Section 180(2) of the Corporations Act requires the directors or other corporation officers who make a business judgment are required to adhere to the requirements of the statutory duty to exercise diligence and care, and the corresponding duties in equity and at common law, in respect of any decision if they engage in the following fiduciary duties: (a)  make the judgment in good faith for a proper purpose; and (b)  do not have a material personal interest in the subject matter of the judgment; and (c)  inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d)  rationally believe that the judgment is in the best interests of the corporation. 2 By proposing to acquire FJC Pty Ltd, Chen who is a non executive director was neither acting in good faith nor did he rationally believe that the proposition was in the best interest of the company. Indeed, Chen had some vested interest that perhaps inspired him to recommend acquisition of FJC Pty Ltd. The fact that he owned substantial shares in FJC Pty Ltd can be understood to be the reason why he wanted Juice ltd to engage in the acquisition. Such an act is in bad faith, and amounts to breach of duty as a director. Jack who is the company’s chairman acts in total disregard of his duty of care by allocating only ten minutes for discussion of such an important agenda. He ought to have allocated enough time so that the members can have adequate and appropriate information on the subject matter (Kling, 2000). Although there was no adequate time to ask questions, it does not warrant Isaac to have shoddily done his analysis as a financial officer; he breached his duty for not applying adequate professional care (Baxt & Baxt, 2005). Non –executive directors are mandated to play a role in operational decision of the company that is of considerable importance (Clarke, 2002). They are supposed to act reasonably by delegating authorities to others. To ensure that the company is being run effectively, they are supposed to make sure that any important financial information is properly recorded and analyzed. As such, the blame on the poor work done by Isaac can as well be spread to the non-executive directors. A recent case from New Jersey, Francis v United Jersey Bank, 3 requires the directors to possess a proper understanding of the fundamentals of business upon which they are acting as directors. Consequently, the directors of juice ltd ought to have an adequate knowledge, to an extent of foreseeing that the acquisition could not work. Furthermore, the duty to use care in decision making requires that the directors have adequate knowledge prior to making decision. The level of information required depends on the magnitude of the decision being made. In this case, decision by Juice ltd to acquire FJC Pty Ltd is a decision of high magnitude and significance - it required adequate time. It was therefore a breach of duty for the chairman to have allocated such a short time for its discussion. In Smith v Van Gorkom the Delaware Supreme Court held the directors were responsible for breach of duty, after they had resolved to sell the company through a merger transaction for $750,000,0004, a decision that was reaching after a discussion for two hours. The court decided that the directors lacked adequate information regarding the value of the corporation by the time they had reached the decision. The directors had agreed to the terms of the merger without knowing that the C.E.O had sponsored the transaction, on a per share basis, and that the share prices represented a premium over which the share were trading at the stock exchange market. In a similar manner, the chairman of the Juice Ltd breached the duty by shorridly forcing the discussion on acquisition of FJC Pty Ltd knowing little that its value which was fixed at $48 million was a misrepresentation of the true value. The court can therefore hold that the chairman together with other directors, who did not also seem to take any action to question the deal, were liable for breaching duty of care (Hyam, 2009). In determining whether a particular director acted in good faith, pertinent questions beyond freedom from financial interest and honesty in the outcome of the decision needs consideration.5 We need to consider whether the directors were negligent in the performance of duties or whether they had any vested financial interests. Chen negligently presented a proposition he had some vested interest in, and in which the valuation was wanting. Chen and other directors owed a duty of exercising appropriate business judgment, and to use ordinary prudence and care in the operations of the business. The directors ought to have discharged their duties in good faith and in the best interest of the company. The level of care required is the one that can be exercised by an ordinary director under similar circumstances. Being the companies’ director, Uma ought to have foreseen the danger of undertaking the acquisition by such a haphazard manner, and advice the other directors accordingly. Elsie and Sam who were present during the discussion did not appear to take any action to rescue the situation, and hence breached their duty of care to the company. Although Else was not present for some good reasons, she also bleached the duty of care , because she ought to have acquainted herself with the subject of discussion and take adequate course of action as far as she could manage (Baxt & Baxt, 2005). Advise the new directors of Juices Ltd whether any of the former directors could avoid liability by relying on the business judgment rule or any other defense Following the Corporate law economic reform program bill 1998 (the ‘Bill’) which was passed by Parliament on 20 October 1999,6 the business judgment rule is now capable of protecting those directors who make business judgments for a proper purpose and in good faith. It will further protect the directors if they shall have acted on an informed basis and without any material personal interest and who have rationally believed that the decision is in the best interests of the company. However, the rule shall be of no assistance if any of the above rules are not met. Uma who is the company director may argue that he was acting in good faith and that he rationally believed that the decision was on the best interest of the company. The director may however be challenged on the grounds that he ought to have been careful enough, to establish that one of the directors had significant stake , in the company that is to be acquired, and also that he ought to have ensured that the valuation of the company is properly done (Jacques, Plessis, & Hargovan, 2010). Chen did not disclose that he had interest in the company that was to be acquired. He may argue that the law does not require him to disclose her interests. His defense however does not seem to go very far as he had already breached most of the rule under the business judgment rule. Under Bosch H, Corporate Practices and Conduct, directors are encouraged to exhibit entrepreneurial style so that they can maintain and improve the shareholders returns.7 It is argued that if the directors were not given freedom to experiment on commercial risks, then the shareholders returns could be reduced (Prentice and Holland, 1993). As a result, the company could perform poorly, and eventually rendering the directors out of their positions. On a larger scale, this can affect the Australia competitiveness on the global scene. This is a strong basis of defense by Jack and Uma who doesn’t seem to have any clear vested interest. They can support their actions on this ground, but any possible breach of care can be used to counteract their defense (Lengman, 2000). Part B - Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 Business Question A The business rule applied in America is quite different from the rule applied in Australia. Indeed, the American rule raises some complexity if applied in Australia. The statutory structures that exist within the two authorities are adequately dissimilar to make the implementation of the American business judgment rule in Australia doubtful. The business judgment in America assumes that the directors knows the circumstances that took place , better than the judges who tries to investigate the matter after the occasion has already transpired. Essentially, it is presumed that the directors acted in good faith and that he honestly believed that his action was in the best interest of the company. The plaintiff is left to proof otherwise, without which the court will assume that the director acted appropriately. On the contrary, in Australia, the defendant directors are assumed to have breached the duty of care unless they proof otherwise.8 (Bosch, 1995). Question B Yes. Justice Austin believe that defense is not available if the decision taken by the director is based on unreasonable believe. The law absolves company directors from liability for breach of duty of care in regard to business judgment only if certain conditions are met in full. These requirements affect not only for the reasons of statutory duties of care and carefulness but also those originating from general law. Absence of any of the following requirements means that the rule does not apply: (a) make the judgment in good faith for a proper purpose; and (b)  do not have a material personal interest in the subject matter of the judgment; and (c)  inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d)  rationally believe that the judgment is in the best interests of the corporation. 9 Which view does Justice Austin favor, and why? In Justice Austin’s view there is a division between sheer mistakes and negligence, and between errors of judgment and negligence. The determination of this depends on the circumstances that prevailed during the time of taking certain actions. Justice Austin considered this approach as sensible and refreshing. Justice Austin also claimed that business judgment such as the one stipulated by the general law is not logical. He maintained that business judgment considerations are applicable to statutory diligence and duty of care. He however made it clear that Business Judgment Rule in section 180(2) is still useful as it could protect an officer from being held liable even though business judgment considered whether duty of care and diligence had been breached. Justice Austin observed that section 180 (2) has good criteria that can be used as a reference point for officers, directors and their advisers. He therefore acknowledged that business judgment rule has an important role especially section 180 (2), which has a practical undertone. He suggested that directors can refer to this section and feel confident that they have complied with their duty of care to the company. Justice Austin also held the view that the company directors or the defendant held the onus of proving the elements of business judgment rule. To reach to this decision, he assumed that there is a need for conscious decision rather than omission which means there is no judgment exercised at all. His view is that business judgment rule cannot assist with failure on the part of the directors (Beaton & Brent, 2011). References Cases Australian Securities and Investments Commission v Rich [2009] NSWSC 1229. Eisenberg, Xhe Duty of Care of Corporate Directors and Officers (1990) 51 U Pitt L Rev 945. Francis v United~lersey Bank, (198t) 87 NJ 15, 30, 432 A 2d 814, 821-822o Legislations Corporations ACT 2001 - sect 180(2). Journal Articles Kling, L. (2000). Negotiated Acquisitions of Companies, Subsidiaries and Divisions. Law Journal Press, 4. Clarke, J. (2002). Directors’ liability for insolvent trading – to trade or not to trade? INSLB, 3(3), 41. Books Baxt, B., and Baxt, R. (2005). Duties and Responsibilities of Directors and Officers. Washington, DC: AICD. Beaton, W., and Brent, F. (2011). Australian Cartel Regulation: Law, Policy and Practice in an International Context. Cambridge: Cambridge University Press. Bosch, H. (1995). Corporate Practices and Conduct (3rd ed). London: F.T. Pitman. Hyam, A. (2009). The Law affecting directors in Australia. New South Wales: Federation Press. Jacques, J., Plessis, D., and Hargovan, A. (2010). Principles of Contemporary Corporate Governance. Cambridge: Cambridge University Press. Prentice, D., and Holland, O. (1993). Contemporary Issues in Corporate Governance. Oxford: Oxford University Press. Parliamentary Debates House of Representatives. (2001). Parliamentary debates (Hansard): House of Representatives. 241. Melbourne: House of Representatives. Press Release Bond University School of Law Bond law review (2000)11 Read More