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Directors’ Duty To Avoid Conflicts Notes

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Class 13 - Directors' Duty to Avoid Conflicts Ss 182-183 S 182 Use of position - civil obligation (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: a. Gain an advantage for themselves or someone else; or b. Cause detriment to the corporation (2) A person who is involved in a contravention of (1) contravenes this subsection (These are civil penalty provisions)

S 183 Use of information - civil obligations (1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: a. Gain an advantage for themselves or someone else; or b. Cause detriment to the corporation (2) A person who is involved in a contravention of (1) contravenes this subsection S 79 Involvement in contravention A person is involved in a contravention if, and only if, the person: a) Has aided, abetted, counselled or procured the contravention; or b) Has induced, whether by threats or promises or otherwise, the contravention; or c) Has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to the contravention; or d) Has conspired with others to effect the contravention

Directors' interests in transactions with their company
[7.340] The general equitable obligation to avoid conflict between duty an interest: an overview
? Another director's duty is to avoid situations where the director's personal interest conflicts or may conflict with their duty to the company - without prior consent of the company
? This is expressed by a number of specific rules including those:

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That apply to transactions between a director and their company and to other transactions with the company in which the director is directly interested Concerned with the liability of directors to account for profits made from such transactions touching their office and to restore to the company property acquired under such a transactions Concerning residual applications of the obligation

[7.345] The tiers of legal rules affecting directors' interests in transactions with their company There are three such tiers: I. The equitable principle enjoining conflict avoidance that makes transactions voidable at the suit of the company irrespective of the fairness of the transaction and so long as it is possible to restore the status quo ante II. Provisions of company constitutions modifying the equitable rule or its consequences - usually by relieving against its rigour III. Statutory duties imposed by the Act?

Equitable rules generally contain either permission or an absolute prohibition with respect to conduct rather than judicial determination of a state of affairs o Cf the US position [436.4]
Replaceable rule s 194 can perform the function of validating transacitons that would otherwise be invalidated y the equitable principle because of the director's interest in them

[7.350] Statutory disclosure obligations with respect to directors' interest in matters affecting their companyS 191(1): A director of a company with a material personal interest in a matter relating to the affairs of the company must give other directors notice of the interest o Disclosure is required for interests in contracts or proposed contracts, offices and property but may be even wider than thisS 191(2): A director need not give notice of the interest if: o The interest falls within an exempted category o The company is a proprietary company and the other directors are aware of the nature/extent of the transaction and its relation to the affairs of the company o The director gave standing notice of the nature and extent of the interest (standing notice will expire if a new director is appointed who isn't given notice

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S 191(3): Notice must include the nature and extent of the interest AND the relation of the interest to the affairs of the company at a director's meeting as soon as practicable after they become aware of it S 191(4): Details must be recorded in the minutes of the meeting. A director's contravention of s 191 doesn't affect the validity of the transaction S 193: These provisions do not displace the operation of equitable rules about conflict of interest and constitutional provisions restricting directors from interests or offices involving such a conflict o Apparently they don't effect constitutional provisions which attenuate the effect of equitable rules either - one such rule is that provided by the Act:
? S 194: If a director of the company has a material personal interest in a matter relating to the affairs of the company and they disclosure it or need not disclose it under s 191 then:
? They can vote on matters relating to the interest
? Any transaction relating to the interest can proceed
? The director can retain benefits under the transaction despite the interest
? The company can't avoid the transaction just because of the interest The interest that attracts the obligation under s 191(1) must be: o Personal - which includes pecuniary interests but also those arising from personal, especially family, interests (Costain Australia's Case). o Material - the standard looks to the showing of a substantial likelihood that, under all the circumstances, the interest would have assumed actual significance in the deliberation
? E.g. director of a public company contracts with another company he is director of (Transvall v New Belgium) Such a conflict can arise through intermediate companies through which a controlling interest is held (Devereaux Holdings)

[7.355] Restriction upon board participation by interested directors of public companiesS 195(1) : A director of a public company that has a material personal interest (MPI) in a matter being considered at a directors meeting must not be present while it is being considered or voted onS 195(2): This doesn't apply if the interest is exempted from disclosure under s 191(2) or if the directors who do not have a material personal interest pass a resolution that:
? Identifies the director, the nature + extent of their interest in the matter and its relation to the affairs of the company

States that those directors are satisfied that the interest shouldn't disqualify them from voting or being present S 195(3): They can participate with ASIC approval in the case of want of quorum or urgency or other compelling reason But if a director with a material personal interest also possesses confidential information relevant to the matter, board disclosure and non-participation may be insufficient to discharger the duty - PBS v Wheeler?Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 (HOL)

Facts: A railway company contracted to buy goods from a partnership. The partnership sue performance - the company sought to avoid it because one of its directors (at the time of contract) was a member of the partnership

Lord Cransworth LC framed the question - whether a director is precluded from dealing o behalf of the company with himself, or with a firm in which he is a partner.

? A corporate body can only act by its agents who must act as best to promote the inte of the corporation whose affairs they are conducting o They have a duty of a fiduciary nature to their principle and no-one can discha this universal obligation and thus be allowed to enter into engagements they h personal interest that conflicts, or may conflict, with the interest of who they a bound to correct o This principle is so strictly adhered to that no question can be raised about the fairness of the contract
? It is impossible to say whether the bargain could have been obtained just as good for other person - but the rule is so strict that such an inquiry is not permitted
? The fact that the rule traditionally applied to leases doesn't change its application to contract here - there is no difference in principle; it is not the subject matter but the fiduciary character of the contracting party (thus it would equally apply to a manager of a trading business etc.)

Was Blaikie so acting in this case? And if so did he while so acting contract on behalf of thos whom he was acting with himself

? Yes - he was not only the director, but the chairman of directors. It was his "bounden duty" to make the best bargain for the benefit of the company
? He entered into contract on behalf of his company with his own firm for iron chairs - h duty imposed on him was to obtain the lowest possible price
? His personal interest would lead him in the entirely opposite direction and induce a high price as possible o This is the very evil the rule is directed in
? The fact that he was one of many directors and not a sole director makes no differenc was his duty to give to his co-directors, and through them, the company, the full bene all knowledge he could bring to the subject. He put his interest in conflict with this du irrelevant of him being a sole or one of many directors. o This applies equally to him not being the sole person in the firm Blaikie Bros

Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558

Facts: Coleman was a stockbroker in partnership with Knight, and was also director of the I As broker, he contracted with Peto & Co (P&C) to place debentures to be issued by a new company for 5% cash and shares commission. At a board meeting, he proposed the IMCA subscribe to the debentures he was to place and offered only a 1.5% commission. He didn't inform them of his agreement with P&C. His proposal was accepted.

The IMCA went into liquidation and the terms of the P&C Agreement came to light. The liqui sued Coleman to account for the Commission he received on the debentures. Article 83 of t IMCA Constitution provided that a director be vacated if contracting with a company he is concerned in without declaring the interest at a meeting of directors where the contract is determined and further that he shall not vote on any question relating to the contract.

Lord Hatherley LC noted that if the regulations didn't provide anything about conflicts this would be straightforward on the basis that a company has a right to a director's "entire services". But the question is here whether the company can stipulate that this is a benefit don't want to avail themselves of. He said that it wasn't for a court to decide to lay down guidance for adult men who can manage their own affairs. Such persons should form their o contracts - a court just has to construe them and lay down rules for protection of people wh not aware of the consequences of entrusting their property to management.

In this case there was a distinct contemplation of directors interested in the concerns of the company, acting and voting when the matter came before them. The shareholders also took precautions they thought necessary. Coleman made adequate disclosure of his interest for a 83 thus validating his agreement with the IMCA.

The liquidators appealed to the HOL.

The Liquidators of the Imperial Mercantile Associations v Coleman (1873) LR 6 HL

Lord Cairns also remarked that in the ordinary case the transaction would not be supporte court of equity and that Coleman would have to account for his profits. Coleman did state h interest to the other directors - in claiming to give validity to the contract Coleman must sh that he has "in letter and in spirit, complied with the provisions of the clause". Hence the question was whether he declared (or shown clearly his interest).

? His Lordship thought not - one declares what their opinions or intentions are when he

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