Corporate Governance and Directors Duties Case Law Flashcards
Directors General Duties
S.171 Duty to Act within Powers
(Codification of the Proper Purpose Rule)
Exercise power for collateral purpose
Howard Smith Ltd v Ampol Petroleum Ltd (1974)
Case: Shareholders who held 55% of the issued shares intended to reject a take-over bid for the company. The directors honestly believed that the bid’s success was in the company’s interest and so allotted new shares to the prospective bidder so that the shareholders opposed to the bid would then have less than 50% of the enlarged capital and the bid would succeed.
Held: The allotment was invalid. “It must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority or creating a new majority which did not previously exist.”
Directors General Duties
S.171 Duty to Act within Powers
(Codification of the Proper Purpose Rule)
Exercise power for collateral purpose
Bamford v Bamford (1969) (example of special resolution and ratification by shareholders)
Case: The directors of Bamford Ltd allotted 500,000 unissued shares to a third party to thwart a take-over bid. A month after the allotment, an ordinary resolution was passed ratifying the allotment, the holders of the newly-issued shares not voting. The claimants (minority shareholders) alleged that the allotment was not made for proper purpose.
Held: The ratification was valid and the allotment was good. There had been a breach of fiduciary duty but the act had been validated by an ordinary resolution passed in general meeting.
Directors General Duties
S.174 Duty to exercise reasonable care, skill and diligence
Example of not carrying out this duty
Lexi Holdings plc (in administration) v Luqman (2009)
Case: Two sisters an their brother were directors of a company. The brother had convictions for offences of dishonesty in the past. The sisters knew this but played no part in the company, demanded no explanations from their brother of his business dealings and did not advise the other directors, auditors and the bank of his convictions. The brother took nearly £60m in fictitious loans, false facility letters and by misappropriation of company funds.
Held: The sisters were, or ought to have been, aware of various matters in relation to the fraud perpetrated on the company by their brother. As a result, they were in breach of their fiduciary and common law duties of care owed to the company.
