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Directors’ Duty Not To Make Secret Profits Notes

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14 Directors' duty not to make secret profits (the appropriation of corporate property, information and opportunity)

STATUTE

* Use of positioncivil obligations (for directors, officers and employees): s 182: (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 ( s 182(1)(a); or (b) cause detriment to the corporation ( s 182(1)(b)). o Reqs for s 182 to apply :
? (1) director, secretary, other officer or employee of corporation (s 182(1))
? (2) improperly use position (s 182(1))
? (3) (a) gain an advantage or (b) cause detriment (s 182(1))
? (4) optional: involved in contravention? Under s 182(2) A person who is involved in a contravention of s 182(1) contravenes this subsection. Under s 79: a person is involved in a contravention if, and only if, the person:

* (a) has aided, abetted, counselled or procured the contravention;

* (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.

* Use of information s 183. (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. o Note 1: This duty continues after the person stops being an officer or employee of the corporation. o Note 2: This subsection is a civil penalty provision (see section 1317E). o (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. Note 2: This subsection is a civil penalty provision (see section 1317E). On s 1317E: Under s 1317E, (1) If a Court is satisfied that a person has contravened s 182 and/or s 183, it must make a declaration of contravention:

* Note: Once a declaration has been made ASIC can then seek a pecuniary penalty order (section 1317G) or (in the case of a corporation/scheme civil penalty provision) a disqualification order (section 206C).

* (2) A declaration of contravention must specify the following: (a) the Court that made the declaration; (b) the civil penalty provision that was contravened; (c) the person who contravened the provision; (d) the conduct that constituted the contravention; (e) if the contravention is of a corporation/scheme civil penalty provision
the corporation or registered scheme to which the conduct related.

Distinct bases of equitable obligation

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Directors are treated as trustees of company funds in their hands or under their control. o If directors misapply company funds they are liable to make good the moneys upon the same footing as if they were trustees: O'Brien v Walker; Re Lands Allotment o A director who misappropriates other property of the company will also be liable as a constructive trustee of the property: Re Lands Allotment Co What if the directors/senior officers acquire property or derive profits not by direct appropriation of company funds or tangible property but by use of their position in the company or in other circumstances where personal interest is opposed to duty? Where there is a sufficient nexus with corporate office that assets or profits are impressed with a constructive trust or are subject to equitable remedy of account. When will a director/officer be under a fiduciary obligation to account to company for benefits derived? In 2 situations. o (1) where benefit was obtained in circumstances where there existed a conflict or significant possibility of conflict between the director's duty to the company and personal interest or another interest which the director is bound to protect: Phipps v Boardman; Chan v Zacharia
? liability is imposed not to redress abuse but prophylactically to prevent fiduciary from being swayed by considerations of personal interest
? Req: director/office can obtain benefit only if all material facts are disclosed to appropriate organ of the company and approved by it. o (2) where benefit was obtained or received by use or by reason of office of director or of opportunity or knowledge resulting from it: Chan v Zacharia . (objective is to preclude fiduciary from actually misusing his position for his personal advantage).
? Req: director/office can obtain benefit only if all material facts are disclosed to appropriate organ of the company and approved by it. Consequences of finding that there is a benefit or gain held by fiduciary in either of those two circumstances? The benefit is held by the fiduciary as a constructive trustee: Chan v Zacharia o Note: immaterial is no absence of good faith or damage to person to whom fiduciary obligation was owed. o Note: In perhaps most cases -constructive trust is consequent upon an actual breach of fiduciary duty; for eg, an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. (ie Actual breach of fiduciary duty and then a constructive trust appears any benefit acquired is held in that trust) o In other cases - may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: for eg, the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. (ie actual failure by fiduciary to account for relevant benefit or gain this benefit is held to be held in trust) Strictness of duty: o Very strict: parker v mckenna (inflexible rule; not relevant at all whether or not there was any damage suffered) o Perhaps parker is an exaggeration: Industrial development v cooley

Principles

* No director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all material facts are disclosed to shareholder and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce (unless constitution provides): Furs v Tomkies

* Business that properly belonged to company - was regarded as being held on behalf of company by the directors: Cook v Deeks

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Here in Cook v Deeks: the entire management of company was in 3 directors hands. They accelerated their work on expiring contract of TCC with CPR in order to stand well with CPR when next contract offered. But the directors never let TCC have the chance to acquire the contract and did not tell 4th director about this. Made another company and the company carried out the new contract.. Thus while entrusted with affairs of company the defendant directors deliberately designed to exclude and used their influence and position to exclude the company whose interest it was their first duty to protect. Thus regarded as holding benefit on behalf of company.

Cases: CB: Furs v Tomkies CB: Furs v Tomkies Facts: HCA: material fact: the payment was obtained by

* D was managing director of P company and manager of a tanning the D in course of branch within the company. transaction which he was

* D was directed by board to conduct negotiations in behalf of P. carrying out on behalf of

* A third party wanted to purchase that branch of the company but only if company in execution of the director /manager would still offer his services. office as managing

* T conveyed this to chairman of P board who informed him that if sale director. went ahead P could not retain him on its staff. Chairman added 'I would advise you to make the best deal you can in the new company' Trial judge thought that D

* Initial deal was for 8,500 + 4,500 pounds. But then D agreed to a service had been put into position of conflict by P, was contract with P which included a payment of 5k pounds in adition to entitled to secure own salary. So purchaser's final offer was only 8,500 pounds. advantage so long as he

* D concealed the matter of the payment to himself from the board +
treated P fairly. No such shareholders. unfairness was proved.

* P claimed the 5k pounds as an undisclosed profit received while acting in a fiduciary capacity Principles:

* No director shall obtain for himself a profit by means of a transcation in which he is concerned on behalf of the company unless all material facts are disclosed to shareholder and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce (unless constitution provides): Furs v Tomkies

* Doesn't matter if the profit is: o Something the company could not of itself have obtained: Furs v Tomkies o No loss caused to company by gain of director: Furs v Tomkies

* Rationale: cannot allow conflict of duty and interest which is involved in pursuit of private advantage in course of dealings in a fiduciary capacity with the affairs of a company.

* In Furs v Tomkies: material fact: the payment was obtained by the D in course of transaction which he was carrying out on behalf of company in execution of office as managing director. He only got it because it fell to his lot to negotiate the sale on behalf of his company that he was able to demand and obtain the sum. [immaterial that company wouldn't have been able to sell the company without him agreeing to go over and take that sum]
o Recommendation: that he had to give complete disclosure to and receive confirmation by the shareholders.

* Issue: can the board of directors put someone in a position in which duty and interest conflict and therefore waive their right to performance of an undivided duty? No: Furs v Tomkies

o Board cannot do this in case of a fellow director: Furs v Tomkies o Even if board purports to give authority - this would be ineffectual - breach of duty by directors to company and D himself would be a party to that breach. Directors were not at liberty to determine in favour of any of their own body that the rights of the company should be disregarded: Furs v Tomkies (Latham CJ) Other notes:

* Note - by his actions in obtaining a sum for his services he diminished how much the company could receive by selling the branch - perhaps the company lost the $5k that he got - but that is not an inquiry the Court goes into.

CB: Cook v Deeks - secretive - ratification by shareholders (oppressive majority vs minority)

CB: Cook v Deeks - secretive - ratification by shareholders (oppressive majority vs minority

Contract/business that properly belonged to company - was regarded as being held on behalf of company by the directors

Facts:

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PC allowed appeal. TCC had 4 directors - 3 held 3/4 capital in TCC (Deeks his brother and Hinds) and last 1 Cook held 1/4 capital. TCC formed to execute a tender for construction of a railway line for the CPR (Canadian pacific railway co) Afterwards, CPR commenced negotiations with two directors of Toronto Co, Deeks and Hinds, for construction of another line. Deek brothers and Hinds formed a new company, DCC, in which Cook had no interest. DCC then carried out new contract with CPR. At general meeting of TCC - Deeks and Hinds used 3/4 voting power to approve the sale of part of company's plant to DCC and declare that TCC had no interest in new contract. Cook sued other directors and DCC, claiming they held the contract for the benefit of TCC.

At trial, action dismissed.

How they did this:

* the entire management of company was in Deeks and Hinds' hands. They accelerated their work on expiring contract of TCC with CPR in order to stand well with CPR when next contract offered. But the directors never let TCC have the chance to acquire the contract and did not tell Cook about this.

* Thus while entrusted with affairs fo company they deliberately designed to exclude and used their influence and position to exclude the company whose interest it was their first duty to protect.

* Thus regarded as holding benefit on behalf of company. Principles:
business that properly belonged to company - was regarded as being held on behalf of company by the directors: Cook v Deeks o Here in Cook v Deeks: the entire management of company was in 3 directors hands. They accelerated their work on expiring contract of TCC with CPR in order to stand well with CPR when next contract offered. But the directors never let TCC have the chance to acquire the contract and did not tell 4th director about this. Made another company and the company carried out the new contract.. Thus while entrusted with affairs of company the defendant

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