Conflicts Duty Flashcards
What is the no conflict rule?
What are some examples in cases?
Under the conflict’s duty in [Bray v Ford], directors cannot place themselves in a position where interest and duty conflict.
Conflict is a real sensible possibility of conflict as perceived by a reasonable man [Boardman v Phipps].
E.g. Director of both company A & B [Aberdeen Railway], shareholdings by directors and even indirect holdings such as being a trustee [Tansvaal Lands], side deals / commission on sales [Furs v Tomkies]
When is conflict okay?
The duty applies as an inflexible rule of EQ – unless there is consent. Consent obtained through (1) a provision in the constitution relaxing the duty or (2) full & complete disclosure of the full nature & extent of the interests coupled with shareholder approval through ordinary resolution at GM [Woolworths v Kelly].
What are the director’s duties under the mandatory / replaceable constitutional provisions?
[s191 (MR)] D duty to disclose full nature & extent of material personal interests at the first available board meeting – MR cannot be overridden by const amendment
[s192] D’s can give standing notice of an interest at any time – even before it becomes material
What is the relevant constitutional provision for proprietary companies?
[s194 (RR)] Proprietary company only – If a director has a MATERIAL personal interest, then provided the director has disclosed the full nature & extent of the interests as required by [s191], then the director can vote on the transaction and retain any profits produced - Public companies would have to proactively draft such a provision into their constitution through special resolution
What is the relevant constitutional provision for public companies?
[s195 (MR)] Public companies only – interested directors cannot vote on the transaction or even be present at the meeting – unless [s195(2)] board resolution allowing D to participate is passed with full & complete disclosure
Facts and ratio of [Guiness v Saunders]?
[Guinness v Saunders]
Facts: Const provision to fix director’s remuneration if agreed to by the whole board – company appointed subcommittee of 3 directors to handle takeover bid – subcommittee agreed to pay X a “fee” – tried to argue that const provision can be construed such that committee can be vested with power – no, strict interpretation
Ratio: Director bears burden of proving they complied with the conditions of the const provision (usually notice). Courts adopt a strict interpretation of the const provision (i.e. look no further than the natural ordinary meaning of the words) [Guinness v Saunders]
Facts of [Grand Enterprises]?
- Director A – simply being the board of both companies without more (e.g. side benefit / profit), insufficient to constitute a breach
- Director B – shareholdings constituted a personal interest, but were not “material” enough
What is the secret profits rule?
•Under the 2nd limb in [Bray v Ford], directors are not entitled to make a “secret profit” from their position [Cook v Deeks].
To determine this, courts will ask whether the director (1) discovered the opportunity in the course fiduciary duty, (2) made a profit, and (3) whether there was no consent.
When is are profits okay?
The duty applies as an inflexible rule of EQ – unless there is consent. Consent obtained through (1) a provision in the constitution relaxing the duty or (2) full & complete disclosure of the full nature & extent of the interests coupled with shareholder approval through ordinary resolution at GM [Woolworths v Kelly].
Can the board waive the breach?
[QLD Mins v Hudson] – suggests that circumstances where the GM is replicated in the board, ratification by the board is sufficient. Despite this, case law is still very much in favour of shareholder ratification.
Facts of [Cook v Deeks]?
[Cook v Deeks]
Closely held company with shareholders as directors – entered into contract under brand new entity with 3/4 directors – went back to original company attempted to ratify their breach with 3/4 majority
Breach so sever it amounted to an expropriation - could not be waived
Facts of [Regal Hastings]?
[Regal Hastings]
- Subsidiary set up for the sole purpose of purchasing new cinemas – always intended to be a wholly owned subsidiary of Regal – However, insufficient cash – Chairman approached directors and solicitor to contribute funds through purchasing the subsidiary’s shares – shares later sold resulting in incidental profits – new directors appointed – former directors sued
- (1) was not an offer made to the world at large – opportunity only arose through their position as a director
- Solicitor not liable as he is not a fiduciary, Chairman not liable as he made no profits
- Here the courts seemed to focus on the “no profit” limb – but chairman seems to be in a position of conflict of duties and interests
Outcome: here, directors in breach even though company had insufficient resources / no conflict of interest / subjective belief they were acting in the company’s best interests
Can directors keep profits made in their personal capacity?
Yes, [Peso Silver Mines]
Facts: Board had comprehensively considered and bona fide rejected the offer due to lack of funds – director could then enter into contract through personal capacity and keep the profits
Factors: (a) offer made to world at large, director did not receive any, (b) new offer every 2 weeks in the mining industry
Ratio: Directors can keep profits if approached in their personal capacity / if board had bona fide rejected the offer
Can an APPOINTED MD keep profits made in their personal capacity?
[IDC v Cooley]
Facts: Did not want to contract with company, but directly with him – attempted to he had made it clear to client that he was speaking in a private capacity – appointed MD’s have one capacity only – liable to account for profits even though company could have NEVER obtained the tender – but at all materials times they WANTED it and would have never released MD from his executive service contract had they known this
Ratio: Appointed MD’s do not have a personal capacity even if no way company itself could have made the profit
Can the BOARD waive the breach?
[QLD Mins v Hudson] suggests that circumstances where the GM is replicated in the board, ratification by the board is sufficient. Despite this, case law is still very much in favour of shareholder ratification.
Facts: Closely held company where shareholders are directors – Mr Hudson presented project proposal to board – not an explicit bona fide rejection as in [Peso], but meeting minutes did suggest board acknowledgement that Mr Hudson was planning to pursue the opportunity in his personal capacity, thus constituting an abandonment – knowledge and consent of the board
