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Directors’ Duty To Act In Good Faith And For Proper Purposes To Print Notes

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BA 12 DD BF, best interests, proper purposes

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BA 12 Directors' Duty to Act in Good Faith and for Proper Purposes

Table of Contents

Section 79 provides that a person is involved in a contravention if, and only if, the person: 1a) 1b) 1c) contravention; or 1d)

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has aided, abetted, counselled or procured the contravention; or has induced, whether by threats or promises or otherwise, the contravention; or has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the has conspired with others to effect the contravention.

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Duty to act bona fide in best interests of the company for proper purposes (s 181): Checklist:
[Prelim: Note the facts: The constitution? Possible that company's constitution could define intersts of company in a way that would affect directors' duty: Whitehouse v Carlton ]
VALID: Smith; Ure; Harlowe; Teck; Cayne (note Canadian case law that suggests that directors can take into account a wide range of interests, eg a belief that a TO will substantially damage): Teck; Cayne

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INVALID: Ngurli; Kinsella; Bell Group; Hogg; Howard Smith v Ampol; Whitehouse; Mills v Mills Note Teck disagreed with Hogg

Rule: Duty to act in good faith in best interests of co and for proper purposes (two rules, three elements) : s 181 (civil penalty provision), s 184 (criminal offence where reckless or intentionally dishonest breach of s 181). (Re Smith; Harlowe's Nominees; hogg v Cramphorn; Teck; Howard Smith v Ampol; Whitehouse; Equiticorp ; Adler; Bell Group) i. GL vs statute: same content of duty under general law as under statute BUT: (1) Statutory list is longer - 'director or other officer'. Under general law, must be a fiduciary. (2) Proving breach of s 181 might be harder to prove on the brigishnshaw standard taking into account possible civil penalty consequences (Adler). ii. the onus of showing that a power has not been properly exercised is on the party complaining: Ure iii. Criminal offence: s 184 - if dishonest or reckless, when breaching s 181, you can be found to have criminal liability. Under Adler judges need proof of lack of honesty or intention to act improperly to be proven. iv. Fiduciary duty, positive? On balance it is likely that this duty is fiduciary. However the HCA held in Breen that fiduciary duties are negative, and in Bell the court seemed to suggest that the s 181 duty and its general law equivalent could require action at times.

1. Does the duty apply? Director or other officer (s 181(1) or a person involved in a contravention (s 181(2)). Section 79 provides that a person is involved in a contravention if, and only if, the person.. eg aid/abets/counsels/induces/ was directly or indirectly knowingly concerned in or party to the contravention or has conspired with others to effect the contravention: s 79.

2. Three elements: (1) honest (2) interests of whole company (3) proper purposes a. First - honest. The test is subjective, court will be reluctant to infer mala fide: Smith and Fawcett . In Smith: director refused to register a transfer of shares to an ex directors' son after the director died. constitution provided directors had absolute and uncontrolled discretion. No ground for concluding that refusal was subjectively bona fide. b. Second - in interests of whole company. (Where directors fail to consult or act by reference those the interests of the company they breach this duty (Greenhalgh; Ngurli; Parke). (Thus for eg, the failure to consier the company's separate interests (that being of the creditors) in Kinsella meant that thre was a breach of the duty.) The interests of the company as a whole is usually the shareholders interests but requires a consideration of all classes not just blockholders (Greenhalgh; Ngurli; Whitehouse). 'Company as a whole' doesn't mean company as distinct from corporators (Greenahlgh). Directors may properly balance considerations of shareholders in shortterm and longterm (eg in Darvall where directors rejected takeover offer, even though shareholders in shrotterm wanted to sell, because directors had in mind transactions which would bring greater benefits to shareholders in long
run). Duties to consider include: i. Existing members (cf s 461(1)(e) oppression remedy) ii. Interests of future members iii. Creditors (Kinsella). Directors are unable to do anything that prejudices creditors when company is insolvent or nearing insolvency (Bell) (cf duty to prevent insolvent trading s 588G; no ratification of damage to creditors Kinsella) iv. Corporate groups (Walker v Wimborne; S 187 wholly owned subsidiary - where director of a co that is a whollyowned subsid, won't breach duty if (a) constitution expressly authorizes director to act in best interests of holding co and (b) director acts in good faith in best interests of holding co

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and (c) subsidiary not insolvent at time director acts and doesn't become insolvent because fo that: s 187. v. Employees: in Parke vi. Where classes of members have inconsistent interests (cf shareholders remedies, oppression remedies or statutory derivative action, relief if board unfairly prejudicial or discriminatory in relation a member; leagues case) c. Third - for proper purposes: i. Onus on complainant: Even if no duty to speak initially by exercise of power (eg refusal to register) duty may arise from circs pointing if unexplained either affirmatively to existence of unjustifiable reason or negatively to absence of legitimate reason: Ure. ii. Two steps: (1) identify purposes for which power may be exercised; (2) determine as fact the purpose for which power was exercised in case (Howard Smith), and whether 'but for' that improper purpose director would have acted (Whitehouse) [Where there are dissenting directors and the majority directors do not all share the same purpose(s), court must ascertain the substantial purpose of the majority directors, even though the majority of the majority may be a minority of board: Harlowe's. iii. Directors can consider longterm interests over shortterm interests of shareholders (Darvall; directors defended a takeover bid because the offer was unreasonably low). Also in Teck (cited in howard smith ) where the directors entered into a transaction that involved issuing shares not to defeat another competitor's attempt to obtain control, but rather to allow the co to obtain the best agreement it could while still in control. iv. Controversy over proper purposes for the share issue power: Power cannot be used to entrench the existing directors, displace an existing majority, alter voting rights, or fight off a takeover for the sake of maintaining control (Howard Smith). Eg where director believed co in better hands of sons than daughter (Whitehouse). a. However, is it improper where the directors honestly believe that it is for the good of the company to defend a takeover? In Hogg it was held that this honest belief did not prvent the issue from being improper (Hogg;). b. However Teck and Cayne have suggested a limitation to this: being that where the object of the share issue is nott o allow the directors to retain control because the directors believe they are better directors than their rivals, but is because the directors honestly believe on reasonable grounds that the competitor will run down the company (reduce it to 'beggary') it was permissible. Re (1) characterising power and legitimate purposes for which exercised:

1. Power Issue shares? (check constitution Whitehouse); a. Can issue shares to: raise capital, foster business connections (Harlowe's); provide employees with an incentive through an employee share plan, pursuant to a dividend reinvestment plan, or capitalize profits by issuing bonus shares (Mills v Mills), in consideration for purchase of an asset (Winthrop). (ie must be a legitimate commercial objective: eg in Harlowe's If directors' purpose is to obtain best agreement for realizing company's assets, then that can be a legitimate purpose for influencing control. Eg in Harlowe's directors issued shares partly paid and couldn't have sued to get rest because co was a no liability co. But Court found that the directors purpose was to give co freedom to plan with company it issued shares with and ensured its longterm stability, rather than impermissible purpose of defeating mystery takeover buyer. b. Cannot issue shares to: displace an existing majority or fight off takeover: Howard Smith; to entrench the existing board of directors (Whitehouse v Carlton - where director wishes to manipulate voting power to ensure that favoured sons would retain control because he believed his sons would be better managers); to discriminate against particular shareholders or classes of shareholders (Mills v Mills); Cannot issue only to benefit self (Ngurli). Cannot issue shares to manipulate voting power to ensure that

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2. Power Register transfer of shares? Can take into account whether transferee's character is such that

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7. membership would reflect adversely on the company's reputation: Ure. (in Smith and Ure - power to refuse registration valid, but constitution permitted this). Power - Transactions (Teck; Offered contract to another and if directors elected to do work would be allotted shares. This defeated another co which wanted the work and to takeover. Valid directors' purpose was to obtain best agreement could while in control. Held permissible for directors to consider reputation, experience and policies of anyone seeking to takeover the company, and can block takeover where they decide on reasonable rounds that the takeover would cause substantial damage to the co's interests. Thus Teck disagreed with Hogg. In Hogg the directors genuinely believed that if outsider tookover company there would be aharmful change in co's trading activities and have an unsettling effect on staff, so co created trust for benefit of employees, and issued shares to trustees with voting rights that would control the majority. Share issue set aside.) Power - grant securities: (Bell) Power - payment: invalid where $$ given to employees in Parke after sale and redundancy Test: whether bona fide, reasonably incidental to carrying on of co's business for co's benefit (Hutton - cited with approval in Parke.) Parke held that it was not the law that directors had to take into account duties to employees. Majority couldn't ratify. (However in Teck - held that it is a breach where directors disregard entirely the intersts of shareholders in order to conr benefit of employees, but if observe decent respect for interests lying beyond those of co's shareholders that is not a breach.) Generic Purpose Defeat takeover ? In Cayne proper for directors who believed that a bidder was a competitor who would run down the company could take action with the substantial purpose of impeding the bidder. In Darvall - within powers of directors to ensure that, where an unsatisfactory takeover offer is made, there is an alternative offer available at a better price. Generic Purpose - to prevent running down of co? Eg in Smith - just that the directors thought it undesirable Eg in Ure - disruption of directorate, want of harmonious company operation, possibly general prejduicail effect on company as a whole (but here the power to refuse register of shares where constitution permitted this)

Remedies: For breach of statutory civil penalty provision? (s 180, 181, 182, 183, 209, or 588G)? (s 1317E declaration).

* Declaration: on application of ASIC (s 1317J(1)) court can grant declaration: s 1317E

* Pecuniary penalty: s 1317G (requires s 1317E) - where contravention materially prejudices or co or members, or ability to pay creditors, or is serious: s 1317E(1)

* Disqualification order: s 206C (requires s 1317E) - where court is satisfied just, purpose to safeguard public interest (ASIC v Adler) - see also centro

* Compensation? S 1317H (asic or co) - court can order person to compensate a co for damage suffered by corp, if person contravenes civil penalty provision and damage resulted from contravention - 'damage' includes profits made by person resulting from contravention: s 1317H

* Injunction: s 1324. If ASIC/person w interests affected by conduct, can: s 1324(1) apply to restrain person from engaging in contravention of act (or being involved), s 1324(10) order person to pay $.

* Exception: Relief from liability? S 1317S/1318 - if person acted honestly and having regard to all circumstances person ought fairly to be excused from the contravention: 1317S, 1318 Breach of GL duty to act in good faith, best interest or proper purposes: (a) Injunction (pacifica); (b) equitable compensation where breach causes loss to company (Tavistock) (c) Declaration; (d) Rescission (where third party has notice of irregularities and breaches of fiduciary duty, rescission could be ordered of the transaction: Transvaal) (transaction in breach of fiduciary duty voidable at election of company) (Camelot), but lost if co ratifies the decision (e) Constructive trust? (cook v deeks) accountable (Phipps) (co cn trace assets into hands of 3rd party with knowledge of relevant ciircs (linter) AND (f) rectification of share register? S 175

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