#8571 - Table Of Cases Directors Duty To Act In Good Faith Best

	VALID: Smith; Ure; Harlowe – and consider Canadian law – that belief that a TO will substantially damage co will prevent a breach of duty: Teck; Cayne	INVALID: Ngurli; Kinsella; Bell Group; Hogg; Howard Smith v Ampol; Whitehouse; Mills v Mills
Intro to Rule	Rule: Duty to act in good faith in best interests of co and for proper purposes (two rules, three elements): s 181: 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). the onus of showing that a power has not been properly exercised is on the party complaining: Ure 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. 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.
(1) Good faith (subjective test: Smith and Fawcett	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.
(2) Best interests or interests of the co: Bell. Cannot disregard certain interests (Greehalgh; Parke; Ngurli): - Shareholders - Creditors Corporate groups: (s 187)	The test is subjective, so valid where directors refuse to register transfer of shares where subjectively believe it is in best interests of co, can be valid: Smith. Any consideration of the objective reasonableness of the directors’ belief is only relevant for considering the credibility of the directors’ assertions of honesty (Bell Group 2012) (best interests) Refused to register a transfer of shares to a shareholder who was a leading member of one faction who purchased enough to get an ordinary resolution and procure election of husband to board – she was a disbarred solicitor – Constitution provided board could refuse to register without giving a reason – VALID: Ure.	Breach where (court infers that the) director was intent only on advancing own interests, didn’t think of benefting corporators as a whole: Ngurli Here a co owed a trustee co $; D was entitled to that $ from trustee. D caused the co to issue shares to the trustee to pay off the $, and then those shares were transferred back to D. D declared a dividend on basis of shareholdings after. shlds challenged capitalization of the debt.
(2) > Creditors?	where company very illiquid or insolvent no directors power can be exercised for proper purposes if it prejudices the interests of creditors: (Walker; Kinsella; Bell group 2012 (Drummond J)). (In Bell co was insolvent at time securities were granted to one creditor the banks over the others creditors). Interests of creditors cannot be overriden by shareholders in ratification resolution either: Kinsell
(2) > Corporate Groups?	Charterbridge vs walker tests Charterbridge test – whether honest and reasonable directors could have made the transactions in the interests of the company. (used by Carr AJA in dissent in Bell 2012); cf reservations expressed about test in equiticorp. Walker v Wimborne (Mason J) require that directors took into account the interests of the particular co. Note s 187 – A director of a co that is a wholly owned subsid of a body corporate is taken to act in good faith in best interests of the subsidiary if: (a) the constitution of the subsidiary expressly authorises the director to act in best interests of holding co; and (b) director acts in good faith in best intersts of the holding co; and (c) subsid not insolvent at time director acts and doesn’t become insolvent because of the act.
(3) Proper purposes (objective test: Adler; Wheeler; Ngurli: Bell group). Two step process: (1) q of law: what purposes can the power be used for? (2) q of fact: what the purpose of the exercise was (Howard Smith) Then consider whether ‘but for’ that purpose the act would have been done (Whitehouse) Consider: takeover situations employee bnefits depriving people of membership	General principles: The issue of shares’ power was conferred to raise sufficient capital to benefit co as a whole: Ngurli Consider Canadian law – that belief that a TO will substantially damage co will prevent a breach of duty: Teck; Cayne Can impede a bidder who is a competitor who would run down the company from taking over the company: Cayne .Where directors believed bidder would reduce their company to ‘impotence and beggary, and the only means available to directors for achieving purpose is to retain control - proper. This is different from directors seeking to retain control because they think they are better directors than their rivals: Cayne). Cf with Teck : purpose not to prevent teck from securing company but to prevent the securing of the deal. Court gave more credence to ability for directors to take into account relevant factors - ‘interests of company’ including employees, the environment (maybe placer able to exploit in a way better for enviroment and community) Note that in Teck the court rejected Hogg, saying that directors were entitled to consider reputation, experience and policies of anyone seeking to take over the company. But even if Hogg was correct, directors’ primary purpose in Hogg was to frustrate attempt to obtain control of company, so not applicable in Teck.] Can ensure that where unsatisfactory takeover officer is made there is an alternative offer better available at a better price: Darvall LEGITIMATE COMMERCIAL OBJECTIVE? Perhaps if directors’ purpose is to obtain best agreement for realizing co’s assets, then that is a legitimate purpose (power exercised was to issue non-transferable shares to another co): Harlowe’s - purpose in issuing shares was to give company greater freedom to plan for joint operations with company it issued shares with, and ensured its long-term stability, rather than the impermissible purpose of defeating the mystery buyer. Directors caused co to issue 38% of issued capital non-transferable for immediate future to another company. Actually couldn’t have sued to get rest of payment for partly paid shares because co was no liability. Court had regard to view’s concerns that the company would have been broken up by someone buying up shares. Found that the directors purpose was to give co freedom to plan with company it issued shares with and ensured its long-term stability, rather than impermissible purpose of defeating mystery takeover buyer.)	General principles: Cannot issue shares to benefit some shareholders or friends at expense of other shareholders etc: Ngurli Cannot issue shares to prevent a takeover: Hogg v Cramphorn (shares were issued for improper purpose – of preventing the majority from obtaining control Facts: Baxter approached Cramphorn in an attempt to buy the company’s capital. In response, Cramphorn and his fellow directors created a trust under which he, the other directors and the employees would hold shares beneficially to...

VALID: Smith; Ure; Harlowe – and consider Canadian law – that belief that a TO will substantially damage co will prevent a breach of duty: Teck; Cayne

INVALID: Ngurli; Kinsella; Bell Group; Hogg; Howard Smith v Ampol; Whitehouse; Mills v Mills

Intro to Rule

Rule: Duty to act in good faith in best interests of co and for proper purposes (two rules, three elements): s 181:

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).
the onus of showing that a power has not been properly exercised is on the party complaining: Ure
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.

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.

(1) Good faith

(subjective test: Smith and Fawcett

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.

(2) Best interests or interests of the co: Bell.

Cannot disregard certain interests (Greehalgh; Parke; Ngurli):

- Shareholders

- Creditors

Corporate groups: (s 187)

The test is subjective, so valid where directors refuse to register transfer of shares where subjectively believe it is in best interests of co, can be valid: Smith. Any consideration of the objective reasonableness of the directors’ belief is only relevant for considering the credibility of the directors’ assertions of honesty (Bell Group 2012)

(best interests) Refused to register a transfer of shares to a shareholder who was a leading member of one faction who purchased enough to get an ordinary resolution and procure election of husband to board – she was a disbarred solicitor – Constitution provided board could refuse to register without giving a reason – VALID: Ure.

Breach where (court infers that the) director was intent only on advancing own interests, didn’t think of benefting corporators as a whole: Ngurli

Here a co owed a trustee co $; D was entitled to that $ from trustee. D caused the co to issue shares to the trustee to pay off the $, and then those shares were transferred back to D. D declared a dividend on basis of shareholdings after. shlds challenged capitalization of the debt.

(2) > Creditors?

where company very illiquid or insolvent no directors power can be exercised for proper purposes if it prejudices the interests of creditors: (Walker; Kinsella; Bell group 2012 (Drummond J)). (In Bell co was insolvent at time securities were granted to one creditor the banks over the others creditors). Interests of creditors cannot be overriden by shareholders in ratification resolution either: Kinsell

(2) > Corporate Groups?

Charterbridge vs walker tests

Charterbridge test – whether honest and reasonable directors could have made the transactions in the interests of the company. (used by Carr AJA in dissent in Bell 2012); cf reservations expressed about test in equiticorp.
Walker v Wimborne (Mason J) require that directors took into account the interests of the particular co.
Note s 187 – A director of a co that is a wholly owned subsid of a body corporate is taken to act in good faith in best interests of the subsidiary if: (a) the constitution of the subsidiary expressly authorises the director to act in best interests of holding co; and (b) director acts in good faith in best intersts of the holding co; and (c) subsid not insolvent at time director acts and doesn’t become insolvent because of the act.

(3) Proper purposes (objective test: Adler; Wheeler; Ngurli: Bell group).

Two step process: (1) q of law: what purposes can the power be used for? (2) q of fact: what the purpose of the exercise was (Howard Smith)

Then consider whether ‘but for’ that purpose the act would have been done (Whitehouse)

Consider:

takeover situations
employee bnefits
depriving people of membership

General principles:

The issue of shares’ power was conferred to raise sufficient capital to benefit co as a whole: Ngurli

Consider Canadian law – that belief that a TO will substantially damage co will prevent a breach of duty: Teck; Cayne

Can impede a bidder who is a competitor who would run down the company from taking over the company: Cayne .Where directors believed bidder would reduce their company to ‘impotence and beggary, and the only means available to directors for achieving purpose is to retain control - proper. This is different from directors seeking to retain control because they think they are better directors than their rivals: Cayne).
Cf with Teck : purpose not to prevent teck from securing company but to prevent the securing of the deal. Court gave more credence to ability for directors to take into account relevant factors - ‘interests of company’ including employees, the environment (maybe placer able to exploit in a way better for enviroment and community)
- Note that in Teck the court rejected Hogg, saying that directors were entitled to consider reputation, experience and policies of anyone seeking to take over the company. But even if Hogg was correct, directors’ primary purpose in Hogg was to frustrate attempt to obtain control of company, so not applicable in Teck.]
Can ensure that where unsatisfactory takeover officer is made there is an alternative offer better available at a better price: Darvall

LEGITIMATE COMMERCIAL OBJECTIVE? Perhaps if directors’ purpose is to obtain best agreement for realizing co’s assets, then that is a legitimate purpose (power exercised was to issue non-transferable shares to another co): Harlowe’s - purpose in issuing shares was to give company greater freedom to plan for joint operations with company it issued shares with, and ensured its long-term stability, rather than the impermissible purpose of defeating the mystery buyer.

Directors caused co to issue 38% of issued capital non-transferable for immediate future to another company. Actually couldn’t have sued to get rest of payment for partly paid shares because co was no liability. Court had regard to view’s concerns that the company would have been broken up by someone buying up shares. Found that the directors purpose was to give co freedom to plan with company it issued shares with and ensured its long-term stability, rather than impermissible purpose of defeating mystery takeover buyer.)

General principles:

Cannot issue shares to benefit some shareholders or friends at expense of other shareholders etc: Ngurli
Cannot issue shares to prevent a takeover: Hogg v Cramphorn (shares were issued for improper purpose – of preventing the majority from obtaining control
- Facts: Baxter approached Cramphorn in an attempt to buy the company’s capital. In response, Cramphorn and his fellow directors created a trust under which he, the other directors and the employees would hold shares beneficially to...

#8571 - Table Of Cases Directors Duty To Act In Good Faith Best Interests Proper Purposes - Business Associations

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