Good Faith, Best Interests, Proper Purpose Flashcards
Test for good faith?
What is the presumption / who bears the onus?
Subjective test – Directors must exercise their discretion bona fide in what they themselves, and not what the court considers, in the best interests of company [Smith & Fawcett]
Presumption of good faith, onus on plaintiff to prove D acting in bad faith [Ure]
How do courts treat share transfer cases (in contrast to share allotment cases)?
In share transfer cases, courts will defer a lot more to the director’s judgement of what is bona fide in in the best interests of the company, than in share allotment cases - If company’s constitution provides power to refuse registration of shares, the only condition on the exercise of that power is that it must be exercised in good faith [Smith & Fawcett] [Ure]
[Smith & Fawcett] Private proprietary company more discretion – comp’s const power to refuse to register share transfers – refused to register shares left to other director’s son in will – valid exercise of power as long as he himself honestly believed
[Ure] Evidence that Ure was going to use shareholdings to appoint her husband (a disqualified solicitor) as the nominee director – Directors refused to register shares – honestly believed it was not in the best interests of the company – proper purpose to prevent appointment of a director who might bring the company into disrepute
How are share transfers treated differently in proprietary companies?
[s1072G (RR)] provides directors of proprietary company with discretion to refuse to register share transfers
What interests can you take into account when making decisions for the best interests “of the company as a whole”?
- Cannot take into account self interest [Ngurli v McCann] - Allotted new shares to give himself control over the company
- Can take into account not only present but also future shareholders [Gaiman] – to prevent individuals hostile to the company’s purpose from becoming shareholders (e.g. scientoligists hostile to mental health organisation)
- Includes creditors if company insolvent [Kinsela]
[Kinsela] Closely held family company where shareholders are directors – entered into an unfavourable lease substantially below market price – when company insolvent / put company into insolvency - Attempted to waive their own breach – interested shareholders cannot vote – insolvency is a bar to shareholder ratification
-Can take into account external stakeholder interests (e.g. employees, environment, customers) as long as there is some connection with benefiting shareholders [Teck]. However, a breach will be established if there is no possible way for D’s to justify it was for the benefit of shareholders no matter how honest and well-intentioned the decision may be [Parke v Daily News] – e.g. cannot consider employee interests at the expense of shareholder interests.
[Parke v Daily News] Struggling company selling its main assets – proceeds of sale used as redundancy payments for employees rather reducing the final dividend payout to shareholders – no benefit to shareholders at all
What about in the context of a corporate group? / Can directors of subsidiary take into account interest of broader corporate group?
What is the relevant statutory provision?
General rule is that subsidiaries are still separate legal entities [Industrial Equity] – directors owe their duty to the subsidiary they are appointed to, and not to the broader corporate group.
[s187] Directors of wholly owned 100% subsidiaries do not breach if they take into account the best interests of the holding company if there is an express provision in the constitution and the company is not insolvent / does not become insolvent as a result of the director’s act.
Historically, stricter approach taken [Walker v Wimborne] – director must show that they subjectively considered the best interests of the subsidiary alone when deciding to enter into the transaction
However, CL has progressed to make a slight carve out. As per the intermediate approach [Equiticorp] – Directors that fail to consider the interests of their subsidiary have committed a breach of duty. If, however, the transaction was, when objectively viewed in the best interests of the company, then no consequences should flow from the breach.
[Equiticorp] Mr Hawkins director of parent company and subsidiaries – used one subsidiary’s funds to pay back debts of another subsidiary – giving away $50M with no benefit to original subsidiary constitutes a breach of duty – evidence that entire corporate group would have collapsed had the transactions not been entered into
What are prima facie improper purposes?
- Self-interest [Ngurli v McCann]
- Maintaining director’s control [Hogg v Cramphorn]
- Interfering with the exercise of the majority of their constitutional rights [Hogg v Cramphorn]
- Blocking a takeover [Howard Smith v Ampol]
- Burden on company to prove proper purpose
How do courts treat share allotment cases (in contrast to share transfer cases)?
In share allotment cases, a subjective belief by directors that they were acting bona fide in the best interests of the company will not be sufficient to avert the breach, if underlying purpose is improper [Hogg v Cramphorn]
Mere fact that self-interest is absent does not make the purpose proper. However, absence of self-interest means breach may be waived by shareholders in GM [Hogg v Cramphorn]
[Hogg v Cramphorn] Trust for employees – issued shares still diluted voting rights – blocked takeover - even if director’s subjectively believed they were acting in complete good faith, in best interests – honestly believed that giving employees an indirect stake in the company would benefit both the employees and the company - underlying purpose was still improper bc it was primarily undertaken to dilute the majority shareholding
Facts of [Howard Smith v Ampol]?
Company either getting taken over by HS or Ampol - Directors issued shares to HS, assisting their takeover as they believed HS was going to provide more money
Q whether share allotment made for raising capital (proper purpose) or to defend takeover (improper purpose)?
Could not have been issued to raise capital – (a) company clearly did not have any urgent capital need, (b) company normally used debt financing, (c) even if true motive, shares should have been offered to all shareholder pro rata, rather than allotting to just 1 shareholder
When can defensive tactics be justified?
Defensive tactics may be justified if the directors apprehend substantial damage to be done to the company if the takeover was allowed [Teck] – e.g. asset stripping, brand reputational damage
[Teck] Even before Teck’s takeover bid, Afton had decided into an “ultimate deal” agreement with Cannex (c.f. [Howard-Smith v Ampol]) - apprehended substantial damage – did not believe Teck would exploit the mine as well as Cannex – furthermore, ultimate deal share allotments common practice in mining industry – courts will not interfere with the exercise of discretion made within the proper sphere of management power
When can refusing takeover bid be justified?
If director’s conduct can be characterised as not simply defeating a bid, but rather to provide shareholders with an alternative / superior bid, then this will constitute a proper purpose [Darvall]
[Darvall] Comp owned land that was worth a lot if developed – refused share bid – weren’t blocking takeover – just acting as normal directors
Test to apply when there are dual purposes on the facts (which there will be)
Where there are dual purposes, improper purpose will only render transaction voidable if it is the dominant purpose - “but for” the improper purpose, would the share allotment have taken place? [Whitehouse v Carlton]
Obiter in [Whitehouse v Carlton]?
Obiter in [Whitehouse v Carlton] suggests that in certain circumstances, const provisions can give power to directors to interfere with the balance of control
