Duty to Act in Good Faith in Company’s Best Interest
- General law fiduciary duty:
✓ Directors must act ‘bona fide’ in best interests of company: Greenhalgh v Arderne
Cinemas
- Statute: s 181(1)(a) --- directors or other officers must exercise powers/ discharge duties in
good faith and in best interests of the company
- What are the best interest of the company
✓ Act in best interests of shareholders as collective group: Greenhalgh v Arderne
Cinemas
• Directors don’t owe duties to particular shareholders and they only owe
duties to the company as a whole. However, there are some special
circumstances that the director misleads particular shareholders that would
be detrimental to them
✓ Director of the trustee company may owe a duty to act in the best interest of the
beneficiaries of the trust
✓ Best interest of the company --- other stakeholders? (e.g. suppliers, customers, etc.)
• Employees: a payment to employees will be in the interest of the company
where their employment continues because its industrial relations may be
improved.
Parke v Daily News: In this case, the company was selling that part of its
business operation, therefore, the payment to employees is an expense of
the company’s shareholders. Hence, there is a breach of duty.
• Interests of creditors --- if the company is insolvency, the interest of the
company are the creditors not the shareholders: Ring v Sutton
• Nominee 被任命 directors: expected to act in the interest of their
appointors rather than the company’s shareholders generally when they
reasonably believe that there is no conflict between the interest of the
appointor and the company; Nominee directors breach their duty where
there is a clear conflict between the interests of the company and the
appointor, and the interest of the company is sacrificed
Scottish Co-operative Wholesale v Meyer: the interest of a holding company
and the subsidiary’s minority shareholders do not coincide, nominee
directors appointed by the holding company are bound to put the interest of
the subsidiary’s shareholders ahead of the interest of the majority
shareholders
• Corporate groups:
Walker v Wimborne: if there is a conflict between the interest of a
subsidiary and the holding company, nominee director must act in the
subsidiary’s best interests
s 187: Director of subsidiary NOT in breach of duty if:
❖ constitution of the subsidiary authorizes the director to act in best
interests of the holding company AND
❖ director acts in good faith in best interests of the holding company
AND
❖ subsidiary is not insolvent at that time or made insolvent by action
, - Examples of breaches--- transactions with little/ no benefit for company
✓ Overpayment for goods/ services: ASIC v Adler
✓ Loan unlikely to be repaid: Walker v Wimborne
✓ Guarantee of debt unrelated to business activities: ANZ v Qintex
✓ Sale at undervalue: Coleman v Myers
✓ Gratuitous payments to employees: Parke v Daily News
Duty to Exercise Power for a Proper Purpose
- General law fiduciary duty
✓ Directors must exercise powers for a proper purpose (directors may breach duties
even if they honestly believe their actions are in the best interest of the company):
Permanent Building Society v Wheeler
- Statutory duty:
✓ s 181(1)(b) --- directors + officers must exercise powers/ discharge duties for a
proper purpose
Directors’ power may be exercised only for the purpose for which they were
conferred (authorized) and not for an improper purpose. AND power conferred
cannot be exercised to obtain private advantage or for purpose foreign to the power:
Mills v Mills; Permanent Building Society v Wheeler
- Matters to consider
✓ Objective element: purpose for which power granted (e.g. issue shares (raise capital)
/purchase land etc.) AND
✓ Subjective element: purpose actually motivating use of power (e.g. gain personal
interest, maintain control, defending takeover)
- Mixed purpose (usually appears when directors are themselves shareholders in the
company; if there is more than one purpose for a share issue, the ‘but for’ test should be
applied to work out whether the directors breached their duties and issue shares for an
improper purpose.)
✓ ‘But for’ test: Whitehouse v Carlton Hotel (which of the purposes was causative of
the exercise of power)
E.G. Will the director issue shares/ purchase land etc. if there is no personal
interest/maintain control etc.
, No, because the shares are undervalued/land is overvalued. If there is no personal
advantage he will not exercise the power. Therefore, personal interest/maintain
control/defending takeover is the causative element which is not a proper purpose.
- Examples of breaches
✓ Issue of shares --- consider the purpose of raising capital for the company, directors
breach their duties if they issue shares to
• Maintain majority control: Ngurli Ltd v McCann
• Defeat a takeover bid
• Alter (create or destroy) voting power of majority shareholders:
Howard Smith v Ampol: directors may breach duties to act for proper
purpose if they use their power to issue shares for the purpose of destroy a
existing majority shareholder
Whitehouse v Carlton Hotel
✓ Use of company funds to promote directors’ re-election: Advance Bank v Fai
Insurances: Directors may exercise their powers for an improper purpose where they
use company funds to promote their own re-election against other candidates.
Although no absolute prohibition, the expenditure should be minimized and be
confined to providing information that promotes an informed decision by
shareholders
✓ Refusal to register share transfer: Australian Metropolitan Life v Ure
✓ Gain personal advantage: ASIC v Adler
Avoid Conflicts of Interest
- Genera law fiduciary duty
✓ Directors must avoid/manage conflict of interest --- Aberdeen Railway v Blaikie
✓ Fiduciary must not place themselves in position where duty + interest conflict:
Phipps v Boardman (this case falls into the category of personal profits/ misuse of
company funds)
✓ Examples:
❖ Contracting with company – direct (personally sign contract with company)
and indirect (the director is a director or shareholder of another company
that contracts with the company): Transvaal v New Belgium
❖ Personal profits (use the position to make the profit): Regal Hastings v
Gulliver
❖ Personal profits: ASIC v Adler
❖ Bribes: Furs v Tomkies
❖ Misuse of information: Artedomus v Del Casale
❖ Misuse of company funds (directors use company’s fund personally or mixed
the fund with another company which associated with directors): Davies v
Davies --- The liquidator investigated the directors use company’s fund to
purchase the building
❖ Taking up corporate opportunity (not allow even it has been approved): Peso
Silver Mines v Cropper; Cook v Deek --- Deeks and other directors formed a
new company in order to carry out the contract to sale plant to the new
company
❖ Competing with the company: Bell v Lever Bros
✓ Liability can be avoided if
❖ Full disclosure before entering the conflict AND
❖ Shareholder approval
, ✓ Can be modified by constitution: Woolworths v Kelly
- Statutory duty (contain different obligations comparing to general law)
✓ s 182(1): A director, secretary, other officers or employee of a corporation must not
improperly use their POSITION to:
❖ gain an advantage for themselves or someone else OR
❖ cause detriment to the corporation
✓ s 183(1): A person who obtains INFORMATION because they are, or have been, a
director or other office or employee of a corporation must not improperly use the
information to:
❖ gain an advantage for themselves or someone else OR
❖ cause detriment to the corporation
(ASIC v Vizard)
✓ It is not necessary that an advantage or detriment occurs. Person could believe that
the intended result would be an advantage or a detriment to the company (Chew v
R; Green v Bestobell industries Pty Ltd)
Additional statutory obligations
- Disclosure of material personal interests
✓ s 191(1) --- a director of a company who has a material personal interest in a matter
that relates to the affairs of the company must give the other directors notice of the
interest
❖ ‘material personal interest’ --- has capacity to influence vote McGellin v MT
King Mining
(in this case, he owns …% shares in B and the scenario explicitly point out
that he has the capacity to influence the vote)
❖ ‘affairs of the company’ --- s 53: business, trading, transactions, dealings,
property, profits, lossess etc.
✓ EXCEPTIONS: s 191(2) --- the director does not need to give notice of an interest
under s 191(1) if:
❖ As member of the company, in common with other members
❖ Remuneration as director
❖ Contract subject to approval of members
❖ Guarantee/security given by director for company debts
❖ Contract with RBC arising just because of director of RBC
• s 50 --- RBC means holding company, subsidiary company and share
common holding company)
❖ Proprietary company and other directors are aware
✓ s 192 --- standing notice possible (notice may be given before the interest becomes a
material personal interest)
✓ Voting Effects:
❖ Proprietary company s 194
• (c) May vote on matters that relate to the interest
• (e) Retain benefits under the transaction even though the director
has the interest
• (f) Company cannot avoid transaction merely because of the
existence of the interest
❖ Public company s 195
• Interested members must NOT
▪ Be present when matter considered by board
▪ Vote on matter
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