General Law and Principles Prohibiting Directors From Conflicts of Interests

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Assignment On Corporate Laws Introduction The Australian law[1] does discourage directors from being involved in situations of conflict between their personal interest and the interest to act for the benefit of the company which otherwise the directors will not act in the best interest of the company. In this analysis the general law and statutory principles which prohibit the directors from being involved into the situations of conflict of interests will be analysed. General Law The general law conflict rule states that a directors or senior executive officers of the company must not place themselves in a position where there is actual or substantial possibility of a conflict between their personal interest and their duty to act in the interests of the company unless the permission of the company is obtained[2]. The company can give its consent only through a resolution of the shareholders in general meeting. Application of Rule The most common situation where the general law conflict rule will apply to a director is when the director enters into a contract to sell property to the company or buy property from the company. In the case of a contract to sell property to the company there is a conflict between the personal interests of the director which is to obtain the highest possible price for the property and the director’s duty to act in the interests of the company which is to ensure that the company gets best deal. This happened in Aberdeen Railway Co v Blaikie Bros[3] where Aberdeen Railway Co entered into a contract to purchase equipment from a Blaikie Bros a partnership business. One of the directors of Aberdeen Railway Co did not tell the other directors that he was a partner in Blaikie Bros. Conclusion I agree with the court decision on the ground that there was a personal interest of that director to sell the equipment to Aberdeen Railway at the highest possible price. However, the director does also have a duty as a Director of the company to obtain those equipments at lowest possible price. Company’s Constitution The clause in the constitution of the company may give the power to director to place himself or herself in a position of conflict. It is a common practice now a day for companies to have a provision in their constitutions that allows a director to have a conflicting interest provided the director discloses their interest. Statutory Principles As per the Corporations Act 2001sections 191 and 192 are to be interpreted as in addition to the general law rules about conflicts of interest of directors. There are 3 parts to statutory regulations which are outlined below. (Hanrahan 2013)
  1. Disclosure of interests by directors
  2. Restrictions on voting by directors of public companies.
  3. Improper use of position or information.
A statutory provision applies on different people than General Law rules. For instance, the statutory provisions that deal with improper use of position and information apply not only to directors and officers but also to employees. Disclosure of Interests by Directors Section 191 of Corporations Act 2001 states that it’s the duty of the directors for both public and proprietary companies to disclose their personal interests if there is any to the other directors unless this section provides for an exemption to this. (Hanrahan 2013) Section 191 also provides that notice to be given by a director to other directors must include:-
  • The nature and extent of the interest and the relation of the interest to the affairs of the company.
  • This notice must be given at a directors meeting as soon as directors becomes aware of their interest in the matter.
  • The details of this interest must be recorded in the minutes report of the company.
Section 191 also states that the requirement for a director to disclose his/her personal interest to the other directors does not apply to a proprietary company that has only one director. Section 191 was applicable in the case of Grand Enterprises Pty Ltd v Aurium Resources Limited[4]. This case states the director’s duty to disclose material personal interest in a matter that relates to the affairs of the company. It was held by the court that the interest of the director was not substantial so there was no need to make such disclosure. Section 192 states that a director who has an interest must give the other directors a standing notice of their nature and extent of interest. This notice must be given in the directors meeting either orally or in writing. (Hanrahan 2013) Restrictions on voting by directors of public companies Section 195 of the Corporations Act 2001 restricts the directors of a public company to be present in the meeting (while the matter is being discussed) and vote for a matter for which they are materially interested unless the other directors approve it. (Hanrahan 2013) Improper use of position or information Section 182 states that a director, other officer or employee of a company must not make improper use of his position to gain advantage for himself or for someone else. They can’t cause any detriment to the company because of improper use of their position. (Hanrahan 2013) Section 183 states that a person who obtains information because they are or have been directors or officer or employee of the company must not make improper use of the information they have to gain advantage for themselves or someone else. They can’t cause any detriment to the company because of improper use of their information. (Hanrahan 2013) Application of Rule The application of section 182 of the Corporation Act 2001 can be seen in the case of Grove v Flavel[5]. As per this case, the director of a company was in financial difficulties, so with the improper use of his position he repays to himself the loan the company owed to him and causes the possible detriments for other creditors of the company. The court held that the conduct of the director breaches his duty to act in the interest of the company constitutes breach of section 182. A director can breach section 182 or 183 even if they believe that their actions are in the interests of the company. This is quite obvious in this case Chew v R[6]. The directors will also be making an improper use of their position if they act in a way for which they don’t have any authority to act. This happened in the case of R v Byrnes[7] where the director signing the documents on behalf of the company but the company has not given its authority for this. R v Heilbronn[8] In this case also the court held that the director had made an improper use of his position and did not ensure that the first company was paid a proper price for the sale of its assets. Policy Reasons The policy reasons why the law discourages the directors from being involved in situations of conflict between their personal interest and for the benefit of the company are as follows:-
  1. To Act for the best interest of the members/shareholders of the company. The human nature is that everybody first wants to look after themselves and to work for their own personal benefit. The directors are also human beings and they are not exception to it so the directors will place their own interest first which restricts them to work wholly for the benefit of the company they are associated with.
  2. To protect the directors from being sued by the companies they are associated with and from others. It will happen when the directors will make improper use of their position and information which causes a detriment to the company.
  3. To protect the creditors of the company. The creditor’s interest might get adversely affected when the directors have conflicts of interests.
Q 2 The listing rules are the set of rules and regulations applicable to any company listed on an Australian Stock Exchange. These listing rules sets out mandatory standards for any public company interested to list its shares and securities for sale to the public. So the listing rules contain the provisions for continuous disclosure and periodic disclosure. (Hanrahan 2013) Continuous disclosure As per listing rule 3.1, 3.1 A and 3.1 B of the Australian Securities Exchange Act (ASX) and section 674(2) of the Corporations Act all the public companies are required to comply with the continuous disclosure obligations which otherwise imposes a statutory liability for its breach upon them. This rule and procedure is designed to ensure that the market is properly informed of the matters which may have a material impact on the value of their shares. (Hanrahan 2013) The directors of the company are ultimately responsible for ensuring the proper implementations of these obligations. They might delegate these responsibilities to appropriate people within the company to ensure that these obligations are met on the company’s behalf. This responsibility is generally assigned to the professionally qualified Company Secretary to ensure compliance with the continuous disclosure obligations. (Hanrahan 2013) The Corporations Act provides the statutory backing to the continuous disclosure requirements of listing rules of ASX. In addition the Corporate Law also imposed continuous disclosure requirements on unlisted entities under section 675(2) that requires unlisted entities also to disclose materially price sensitive information to ASIC as soon as reasonably practicable. (Hanrahan 2013) The continuous disclosure also have objective of preventing the emergence of a false market as a result of the premature disclosure of information in certain matters and safeguarding the commercial interests of disclosing entities. There are certain exceptions under which the entities are permitted to hold materially price sensitive information which are as follows:-
  • When the disclosure causes a breach of law.
  • When the information to be provided is incomplete or uncertain. This information might mislead the investors.
  • When the disclosure of that information is against the commercial interests, trade secrets and commercial negotiations of the business.
The entities are also required under the listing rules to make ongoing disclosures in certain specific matters such as takeover bids, buy backs and capital reconstruction decisions to the investors. (Hanrahan 2013) Periodic Disclosure A periodic disclosure is when the disclosing entities should be required to present certain reports after a fixed time period such as annual reports and other interim reports to the public. These periodic reports facilitate investor’s decision making process by the way of comparing and monitoring the performance of the entities over regular intervals. The principle behind the general guidelines for ongoing periodic disclosure is to help promote consistently high quality disclosure provided in the periodic reports of the entities whose shares are traded in the international and domestic markets. (Hanrahan 2013) Periodic Reports should contain the relevant information Annual Reports The annual reports should contain an audited financial statement that covers the entire prior financial year. It must also indicate if any significant change has occurred during that financial year that could have a material on an investor’s decisions. It should also contain a Management’s Discussion and Analysis and its ability to generate amounts of cash and to meet its cash obligations. The Annual Reports must also contain the following information. (Hanrahan 2013)
  • About the Director and Senior Management compensation.
  • About the Corporate Governance practices. It will improve the investor’s confidence in the entity.
  • Audit committee’s reviews.
Interim Periodic Reports These reports contain information that will enable investors to track the performance of a company over a period of time and make comparative analysis to assess the current financial status of a company. These reports are like quarterly and half yearly reports that can assist investors. In these reports the persons responsible for the financial statements should be clearly identified and they must state that the financial information provided in the reports is true and fair.

Similarities

The primary purpose of continuous disclosure and periodic disclosure is to ensure the existence of an informed secondary market for financial products. The companies are required to disclose all the materially price sensitive information on a continuous basis to all categories of investors. There is a significant overlap between the frameworks of both the disclosures since both exist for the same purpose. Differences The periodic disclosure requirements are required to meet in each quarter, half year and end of a year. Periodic disclosure requirements support and supplement the continuous disclosure obligations of a listed entity. The rationale of continuous disclosure is that all investors should have an access to the sensitive information on equal basis so that the particular market participants are not disadvantaged in relation to others. This is important to ensure that the operation of a financial market is fair and transparent. Relationship between Periodic and Continuous disclosure The listed companies are subject to both periodic and continuous disclosure requirements. Half yearly reporting mixed with an effective continuous disclosure regime appears to provide appropriate disclosure to the market while minimizing compliance burdens for entities. However, the entities can choose to report quarterly and it would add significantly to meaningful information available to the market. A continuous disclosure is a vital component of Australia’s corporate disclosure framework. Any future increase in the frequency of periodic reporting by disclosing entities should not be at the expense of the current requirement of continuous disclosures. Both continuous and periodic disclosures are equally important for the better informed financial markets. (Hanrahan 2013) Q 3 I agree with the court’s decision to dismiss the plaintiff Smits claim on the following grounds and to give the judgment in favour of defendant. In the case of Smits v Brown [2012] QSC 180 the following facts, issues and principles are the key factors that needs to be observed and considered. Relevant Issues According to Section 6 Partnership Act 1891 the rules for deciding the existence of partnership and from the facts of the case it is quite obvious that there exists a partnership between Donald Gordon Ogle and Warren Thomas Brown. It is evident from the written agreement (1995 Agreement) between Ogle and Brown to develop and resell the land. According to Section 8 of the Partnership Act 1891 every partner in a partnership is an agent of the partnership firm and can bind the firm and all partners while carrying out the usual way of business operations of the partnership, unless that partner has no authority to act for the firm in that particular matter. Section 12 of the Partnership Act 1891 also says that every partner is a partnership firm is liable jointly with the other partners for all the debts and obligations of the firm incurred while he was the partner to the partnership. Even his personal property can also be used to pay the business debts and obligations. In the given case one of the partners of the partnership Ogle had borrowed a loan in the year 2001 from Elliott & Harvey. The purpose of the loan is the usual operations of the business since Ogle can bind the other partners by the way of his actions so Brown the other partner should also be liable to pay that raised debt. But in the given case on 10 September 1998 Ogle and Brown entered into a second agreement (1998 Agreement) which terminates the partnership. So as per 1998 Agreement the Brown was released from any continuing obligations. So the debts rose by Ogle after 10 September 1998 was in his name and for his own purposes only and for which the Brown is no more liable. Because the partnership between Ogle and Brown ended in 1998, some years before the debt were incurred. It was also mentioned in the 1995 Agreement (Partnership Agreement) that Brown was entitled to withdraw from the partnership with Ogle at his discretion at any time and if he did so, all obligations between the parties would cease. Section 40 of the Partnership Act 1891 says about the right of partner to notify dissolution of the partnership. It says that any partner may publicly notify about the dissolution of the partnership but he is not obliged to do that. It all depends upon his discretion whether he wants to declare it publicly or not. So as per the facts of the given case Brown is not obligated to inform the public about the dissolution of his partnership. So even if he does not notify to public he is not at fault. But still he could not be held responsible for the debts of the partnership for which he was not a partner any more. 1
[1] Corporation Act 2001 (Cth) (Corporations Act). [2] Commercial Applications of Company Law 14 Edition Harahan etal page 14-120. [3] Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461.

[4] Grand Enterprises Pty Ltd v Aurium Resources Limited (includes corrigendum dated 16 June 2009) [2009] FCA 513 (28 May 2009)

[5] Grove v Flavel (1986) 4 ACLC 654 at 662. [6] Chew v R (1992) 10 ACLC 816; 173 CLR 626; 7 ACSR 481. [7] R v Byrnes (1995) 13 ACLC 1, 488; 130 ALR 529; 17 ACSR 551. [8] R v Heilbronn (1999) 30 ACSR 488.
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