#8574 - Restrictions On Indemnities - Business Associations

1. Rules

2. Exemption from liability as officer or auditor

3. Indemnification against liability as an officer or auditor

4. Directors and officers insurance

It may suit a company to allow a director to receive a personal benefit from some transaction involving the company. The company may believe that "it is better to have directors who may advance the interests of the company by their connection, and by the part which they themselves take in large money dealings, than to have persons who would have no share in such transactions as those in which the company is concerned": Imperial Mercantile Credit Assn v Coleman.

Unless the constitution provides otherwise, the company in general meeting can with full knowledge of the director's interest:

• authorise an interested director to act in what would otherwise be a breach of duty; or

• ratify a completed act in breach of duty: Regal; Furs v Tomkies

The disclosure required before the consent of the company in general meeting can be said to be informed must be of both the nature and extent of the conflicting interest or duty or the profit-making opportunity. There should be disclosure of information which the "average commercial man in the street" would think the members should have, remembering that there are problems in presentation, in that too much information can pose difficulties for members as much as too little information: Buttonwood Nominees

When the company in general meeting considers giving consent, can the interested director use the voting power of any shares held by the director? There is old authority allowing the director to vote, provided there is no improper dealing with the company's property: North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 ; Burland v Earle [1902] AC 83 . However, the legislature, ASIC and the ASX have thought it appropriate in recent times to exclude interested parties from voting at shareholders' meetings. The circumstances in which this occurs are discussed at [10.040] , where it is suggested that Australian courts may ultimately move towards treating the controlling shareholders in general meeting as fiduciaries. If this were to occur, the controlling shareholders would not be able to use their voting power in a self-interested way. Consequently directors who were also controlling shareholders would be subject to similar fiduciary constraints in each capacity. But Australian law has not yet taken this step.

Nevertheless, the power of shareholders to vote in a self-interested way is subject to some constraints. Shareholders cannot vote in such a manner as to perpetrate a fraud on the minority, and Pt 2F.1 provides a statutory remedy in cases of oppression, unfair prejudice or unfair discrimination. At least on occasion an attempt by shareholders to authorise or ratify a breach of fiduciary duty would constitute fraud on the minority or oppression or both.

The clearest case of an invalid attempt to authorise or ratify a breach of duty would be where the breach is tantamount to theft of the company's property, contrary to the misappropriation rule. It is arguable that breaches of this kind cannot be condoned even by a unanimous decision of shareholders. Conversely, the Regal (Hastings) case and Furs v Tomkies tell us that certain kinds of breach of duty are ratifiable by ordinary resolution. It may be relevant that in these cases the fiduciaries were acting honestly, believing that their conduct would not harm the company. It may also be relevant that in neither case did the directors misappropriate any company property.

Cook v Deeks cannot be confidently reconciled with these principles. In that case the Privy Council held that a purported ratification of the directors' conduct by majority resolution of the shareholders was ineffective, on the ground that the contract which the directors had acquired for their own benefit "belonged in equity" to the company. If the case was truly one of misappropriation of property, it would be easy to understand the conclusion that the breach was not ratifiable. But the contract as an item of property came into existence only pursuant to the breach, just as the profit of the Regal directors arose out of their breach.

Perhaps Cook v Deeks is best explained as a case where the court regarded the circumstances as extreme enough that they should substitute their opinion of fairness for the opinion of the majority shareholders, making (in effect) a value judgment of the kind described by Jacobs J in Crumpton v Morrine Hall Pty Ltd [1965] NSWR 240 at 244 . See the discussion at [10.060]ff .

An important limit on the power of shareholders to ratify breaches of duty is that shareholders cannot ratify breaches of the statutory duties imposed upon directors: Angas Law Services; Forge v ASIC (2004).

However, it may be that a court can take the opinion of shareholders into account in determining whether to make orders under Pt 9.4B where there is a breach of a statutory duty imposed upon a director and also in considering whether to relieve a director from liability under s 1317S. There is also an open issue as to whether different considerations may apply to authorisation given by shareholders in advance of the action taken by directors as opposed to ratification following the action taken by directors.

There is further discussion of these issues and of ratification generally at [8.370]-[8.395].

Listed companies

ASX Listing Rule 10.1 requires the prior approval of shareholders in general meeting for certain substantial transactions between a listed company, or any entities with which it is associated, and directors: TNT Australia Pty Ltd v Poseidon Ltd (No 2) (1989) 15 ACLR 80 .

The consent of the remaining disinterested directors will not suffice to remove the company's right to complain of a breach of duty on the part of the interested director. The reason is that the director owes his or her duty to the company, and the company is entitled to have the unbiased advice and participation in the decision of every director: Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431; 9 ACLC 539 .

Co-directors can, however, be authorised by the constitution to consent to a director being interested in a transaction or acting while having a conflict of duties. When disinterested directors are so authorised they have a duty to scrutinise the particular transaction to ensure that it is fair to the company. That is in addition to their duty to check that the transaction will advance the interests of the company. A purchase of property by the company from a director may be at a fair price, but the disinterested directors have also to determine whether it is beneficial to the company to acquire that property for the company's business.

Although a board cannot, without authority in the constitution, consent to what would otherwise be a breach of duty by one of its number, a board may, depending on the particular facts, have authority, under its management mandate, to renounce on behalf of the company a particular business opportunity, even though that leaves the opportunity available to a director who exploits it. The conflict is removed by the board putting the opportunity outside the scope of the fiduciary relationship in circumstances where the company cannot exploit it. That happened in Queensland Mines Ltd v Hudson (1978) 18 ALR 1; 3 ACLR 176; (1977-78) CLC 40-389 .

The facts of Queensland Mines may be considered exceptional in that the company was in the nature of a joint venture and in joint ventures directors are identified more closely with factions of shareholders than in ordinary companies. One shareholder of Q company (the company which was alleged to have renounced the opportunity exploited by one of its directors, H) was F company, which held a 51% interest in Q...