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Class 13 Directors’ duty to avoid conflicts
Corporations Act ss 182, 183.
CORPORATIONS ACT 2001 - SECT 182
Use of position--civil obligations
Use of position--directors, other officers and employees
(a) gain an advantage for themselves or someone else; or
CORPORATIONS ACT 2001 - SECT 183
Use of information--civil obligations
(a) gain an advantage for themselves or someone else; or
The director’s fiduciary obligation includes the duty to avoid situations where without the consent of the company, the director’s personal interest conflicts or possibly conflicts with their duty to run the company.
The interest that attracts the statutory disclosure obligation in s 191(1) must be both personal and material.
Not limited to pecuniary interest. Personal interests may include interests arising from close personal relationships especially family relationships [R v District Council of Victor Harbour; Ex parte Costain Australia Ltd (1983)],
The standard of materiality in related contexts looks to the showing of a substantial likelihood that, under all the circumstances, the interest would have assumed actual significance in the deliberations.
Where the director of another company which is contracting with the public company, the materiality would ordinarily be satisfied so that disclosure is required.
Generally for purposes of disclosure, an interest need not be director but may be held through intermediate companies in which a controlling interest is held.; Devereaux Holdings Pty Ltd v Pelsart Resources NL (unreported, 1985)
Chan v Zachariah: A person in a fiduciary relationship cannot put himself in a position where his interests and duty conflict. This prevents a person from being swayed by personal interests and misusing his position. This includes positions where there is a “significant possibility” of conflict.
[7.360] Aberdeen Railway Co. v Blaikie Bros (1854):
A director should not enter into engagements in which he has or can have a personal interest conflicting, or which may conflict, with the interests of those whom he is bound to protect.
Frieda owns the property so she wants the highest price but being director she would want the lowest price for the land.
It doesn’t matter what price it is being sold for – do not consider the price.
The mere fact that she is just the one – makes the resolution invalid and the transaction voidable.
The remedy is restitution
Curing Conflict: Disclosure of the Interest
Where the director discloses the interest and abstains from voting, depending on the articles, this will usually be sufficient to avoid an equitable breach.
Material personal interest:
S191(1): A director who has a material personal interest in a matter that related to the affairs of the company must give the other directors notice of the interest unless s191(2) states otherwise.
S191(2): When notice is not required
R v District Council of Victor Harbour: A personal interest includes but is not limited to a pecuniary interest; it may arise from close personal relationships.
S191(3)(a): The notice required by s191(1) must give detail of (i) the nature and extent of the duty and (ii) the relation of the interest to the affairs of the company; AND
S191(3)(b): Be given at a directors meeting as soon as practicable after the director becomes aware of their interest in the matter.
Gray v New Augarita Porcupine Mines: The amount of detail disclosed in the notice must depend on the nature of the contract or arrangement proposed and the context in which it arises.
Effect of disclosure (Proprietary Companies only):
s194: If a director has a material personal interest and
discloses the nature and extent of it (per s191) or
doesn’t need to disclose (per s191(2)), then
s/he may vote on matters that relate to the interest and
any transactions relating to the interest may proceed. Also,
the director may retain benefits under the transaction and
the company cannot avoid transaction because of the existence of the interest.
Restrictions on Voting (Public Companies only):
s195: A director of a public company who has a material personal interest in a matter that is being considered at a directors’ meeting must not:
be present while the matter is considered at the meeting, or
vote on the matter
These restrictions will not apply if interest is exempt under s191(2) (s195(1A)(b)) or directors pass a resolution identifying the director, nature and extent of interest and its relation to the affairs of the company (s195(2)(a)) and the directors are satisfied that the interest should not disqualify the director from voting or being present (s195(2)(b)).
Who should disclosure be made to:
Imperial Mercantile, Transvaal: Where provided, full disclosure to the board may be sufficient.
Qld Holdings: In other circumstances, full disclosure to a disinterested board may be sufficient.
Imperial Mercantile: Otherwise, disclosure should be made to the general meeting who must approve the transaction by ordinary resolution.
Consider the General Meeting
There will be an article which says that you can get around this problem by disclosing to the directors – based on the articles of association. This is because this is approved by the General Meeting
s203D(1) – Removal by Members – public companies only
Note; there is a difference between:
Conflict of duty and duty - (the kind of circumstances which are found in Aberdeen Railway, Imperial Mercantile Credit – where the director has another equitable duty - in that case, there is not a conflict of interest simply, there is a conflict of duty and duty
2 lots of disclosures are required – therefore more difficult to manage.
Conflict of duty and interest - The other kind of conflict, the one more universally referred to and the one that comes up more often today, and is often easier to fix up – it is the conflict of duty and interest- the director relates to the company as a director and in his own personal account as a principal e.g. wishing to sell an asset to the company.
Director can disclose the nature of their interest to the company and the Board can consider the nature of the conflict and whether it is still in the interest of the company to go ahead. Details of disclosure will have to be looked into.
Articles are important as they are a fairly comprehensive contractual modification of the general law.
Director Sitting on 2 Boards – duty to avoid conflict
[7.360] Aberdeen Railway Co. v Blaikie Bros (1854)
A railway company contracted to purchase iron chairs from a partnership. The partnership sued for performance of the contract. The company sought to avoid the contract on the ground that, at the time of contracting, one of its directors, Blaikie, was a member of the partnership.
Lord Cranworth LC: It is a rule of universal application that no-one can enter into engagements in which he/she has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect.
This principle is so strict that no question can be raised as to the fairness or unfairness of the contract to be entered into.
The inability to contract depends not on the subject matter of the agreement, but on the fiduciary character of the contracting party.
[The rule arises from the principle that the company is entitled to the independent deliberation of all its directors.
Note this original formulation, requiring merely “possibility” of conflict, is a strict formulation]
Present case: In this case, B’s duty to the company imposed on him the obligation of obtaining the chairs for the lowest possible price while his personal interest would induce him to fix the price as high as possible. Therefore there was a conflict between his interests and his duty.
The individual is a partner of the partnership. They are both individuals but have fiduciary duties to the partnership. Duty v duty situation.
Court of Appeal in Chancery
Coleman was a stockbroker in a partnership and a director of the association. As a broker he contracted with a company to procure subscriptions for debentures to be issued by a new company. At a board meeting, he proposed that the association subscribe for the debentures. He did not inform the meeting of his agreement with the debenture company but he did say he had an interest in the transaction. Coleman did not disclose his interest in any elaborate way but did indicate his interest as a stock broker. The board accepted C’s proposal. The association later went into liquidation.
Can the company contract around the fiduciary principle? What do you have to do to effectively do that? You must have disclosure and consent from the fiduciary of the company. Coleman made adequate disclosure in indicating he was interested in the disclosure. They went to the HL which took a tougher approach for disclosure and consent. The disclosure has to be detailed and comprehensive because to consent you must know exactly what it is you are consenting to. The BOD had no idea of the nature or extent of Coleman’s personal interest in the deal. The amount of personal interest was important for the decision. It is not enough to have a mere indication of the vendor, where there is a fiduciary capacity you need to know everything and the directors need to know this also to discharge their duty to the company. They must know what they are agreeing to on the company’s behalf or they are not acting for their duty for the company acting on their behalf.
The company’s constitution provided that the office of a director shall be vacated if he contracts with the company or is concerned in or participates in the profits of any contract with the company without declaring his interest the directors meeting. It also provided that no director should vote at any meeting relating to such contracts.
Lord Hatherley LC: Found that Coleman had made adequate disclosure of his interest for purposes of the constitution and the article of the CN validated Coleman’s agreement with the association.
On appeal – a different view was taken:
Case on adequacy of disclosure
Lord Cairns The director must declare what his intentions are – simply stating that he had an intention is not adequate.
A man declares his opinion or his intentions when he states what his opinions is, or what his intentions are, not that he has an opinion or that he has intentions;
One of the articles permitted directors to get the ok from other directors. It is a question of using the articles as a matter of disclosure.
Present case Found that had the directors known the true nature of his interest they would have changed their position by either declining the subscription altogether or insisted on a much larger share of the profit. It was argued that Coleman having stating the existence of his interest, it was then up to the Board to inquire about its nature. He did not accept this argument because he felt that it was not open to Coleman, if he wanted to comply with the clause, to leave it to chance whether the Board would inquire. Therefore Coleman is liable for the whole of the profits which were obtained. It is insufficient to just tell the directors.
Conflict with Duty as Trustee
[7.375]Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co.  2 Ch 488
Chancery Division and Court of Appeal
Action to set aside two transactions between the plaintiff and defendant companies on the ground that the resolutions of the board of the plaintiff company by which they were authorised were invalid owing to the directors’ interests therein.
The directors of the plaintiff company were Young, Samuel and Harvey. Samuel was also a director
Samuel submitted the desirability of acquiring shares of Lydenberg Co. Samuel, being a director of the defendant company did not vote (also had 5% of shares).
Another board meeting took place to acquire forfeited shares. Samuel did not vote.
The plaintiff company after discovered that Harvey held 1000 shares in the defendant company as trustee. The shares were put in Harvey’s name by his father-in-law Thompson. The shares remained in his name after Thompson’s death. Harvey had voted for the resolutions without disclosing his shareholding in the defendant company and without disclosing the fact that two days before the second resolution he had been appointed a director of the defendant company.
Referred to the principle in Blaikie Bros
Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards and owes a duty to another company which is proposing to enter into engagements with the company of which he is a director, he is within the Blaikie rule
He has a personal interest within the rule or owes a duty which conflicts with his duty to the company of which he is director.
It is immaterial whether this conflicting interest belongs to him beneficially or as a trustee for others. He is bound to do as well for his cestuis que trust as he would do for himself.
Court held that the interest Harvey had was sufficient for him to disclose even though he was not beneficially entitled to any benefit directly
In this case, art 98 modified the above rule by enabling a director of the company to be interested as a member of a company with which the plaintiff company is contracting. But it requires that the director shall disclose the nature of his interest and shall not vote in respect of any contract in which he...
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