WS4: Director's Duties; 170-174 Flashcards
What happens if a director breaches duties?
Can be liable to company for loss they have caused, but liability for breach can be avoided if director’s conduct is capable of subsequent ratification / approval by shareholders.
Who do directors owe duties to?
The company not shareholders
What is the principle of equitable fiduciary duties?
They must not benefit from their position of trust.
What are the directors duties in CA based on?
They are based on the old common law rules and equitable principles
What does S171 CA say?
Directors have a duty to act within powers.
What does a duty to act within powers actually mean?
Duty to act within the company’s constitution
Example of breach: acting without authority, committing company to borrow more than articles allow
Duty to exercise powers for the purposes they are conferred - proper purpose doctrine
What is the proper purposes doctrine?
Directors should exercise their powers bona fide in what they consider in the interests of a company, and not for any collateral purpose.
Examples of the proper purposes doctrine:
An allotment of shares to destroy the voting control of the majority shareholders was improper
A share issue designed not to raise capital but to frustrate a takeover offer was improper. “unconstitutional to use fiduciary powers to destroy existing majority / create a new majority”
Manipulating the fate of a particular shareholder resolutions / altering the balance of forces at a company general meeting is outside proper purposes doctrine
What is the test for determining an improper purpose?
[Objective test]
- Identify the power whose exercise is in question;
- Identify the proper purpose for which that power was delegated to the directors;
- Identify the substantial purpose for which the power was in fact exercised; and
- Decide whether that purpose was proper.
HOWEVER; directors can use their powers to protect a company on reasonable grounds if the proposed takeover will cause substantial damage to the company. Power of directors to issue shares can be exercised for reasons other than the raising of capital provided those reasons relate to a purpose benefiting the whole company.
What is the S172 duty?
A director must act in a way he considers, in good faith, would promote the success of the company
What does promoting success of company need to consider?
Consequences of any decision long term
Interests of employees
Need to foster the company’s business relationship with suppliers, customers and others
Impact of company on community / environment
Maintaining high standards of business conduct
Need to act fairly between members of the company
What is the test for S172?
Would an intelligent and honest man in the position of a director for the company have reasonably believed that the transactions were for the benefit of the company?
How is ‘success’ of a company interpreted in view of S172?
Long term increase in value of a company. In insolvency, this would also include creditors
What is S173?
The duty to exercise independent judgment
What does exercising independent judgment mean?
Not fettering the future exercise of discretion, unless this is in the best interests of the company.
It is a breach of duty for a director to allow himself to be dominated, bamboozled, or manipulated by a dominant fellow director.
