TOPICS COVERED
TOPIC 3: FORMATION AND CIASSIFICATION OF COMPANIES TOPIC 4: INCORPORATION AND ITS EFFECTS
TOPIC 5: CORPORATE FINANCE
TOPIC 6: THE CONSTITUTION AND REPLACEABLE RULES TOPIC 7: COMPANY ORGANS AND THE DIVISION OF POWER
TOPIC 8: THE BOARD OF DIRECTORS AND THE GENERAL MEETING TOPIC 10: OVERVIEW OF DIRECTORS’ DUTIES
TOPIC 11: DUTY OF CARE SKILL AND DILIGENCE TOPIC 12: DUTY TO ACT IN GOOD FAITH
TOPIC 13: DUTY TO AVOID A CONFLICT OF INTERESTS TOPIC 14: RATIFICATION AND RELIEF FROM LIABILITY TOPIC 15: SHAREHOLDERS' DERIVATIVE ACTION TOPIC 16: SHAREHOLDERS’ PERSONAL ACTIONS
TOPIC 17: OPPRESSION, WINDING UP AND STATUTORY INJUNCTION
FORMATION & CLASSIFICATION
STEP 1 – INTRODUCTION
‘Corporation’ is broadly defined to include ‘companies’, ‘body corporates’ (whether incorporated in this jurisdiction or not) and unincorporated bodies that may sue/be sued and hold property (s57A(1)).
A company (co) is an artificial entity recognised by law as a legal person with its own rights and liabilities (s124). Co’s are corporations (corps) registered under the Corporations Act (CA) (s9).
STEP 2 – CLASSIFICATION ACCORDING TO LIABILITY OF MEMBERS
The types of co’s that can be registered are set out at (s112(1)):
Co limited by shares
• Member liability is limited to the amount owing (if any) to the co for the shares bought (s516).
• “Limited” or “Ltd” must be in the co’s name (s148(2)).
Co limited by guarantee
• Member liability is limited to the amount they have undertaken to contribute to the co’s property if the co is wound up (s517).
• Has no share capital and no power to issue shares (s124(1)).
Unlimited with share capital
• No limit on the liability of members (s9).
• Past and present members may be liable (s515).
No liability (mining co’s only: s112(2))
• Members are not liable beyond the paid amount – not even on unpaid amounts (s254M).
• A NL co must not engage in activities outside its mining purpose objects (s112(3)).
• Must have “No Liability” in its name (s148(4)).
STEP 3 – PUBLIC VS. PROPRIETARY COMPANIES
Proprietary Companies
• A proprietary co is a co registered as such under the Act (s45A(1)).
• Must have “Pty” or “Proprietary” in its name (s148).
• Must have no more than 50 non-employee shareholders (SH’s) (s113(1)).
• Must not offer shares to the general public (s113(3)) – cannot engage in any activity requiring disclosure to investors under Ch 6D.
- Can offer shares to existing SHs or employees however (s113(3)).
Large vs. small proprietary companies
• A pty co is small for a financial year if it satisfies 2 of the following 3 criteria (s45A(2)):
a. Consolidated revenue for the co’s (and its subsidiaries’) financial year is less than $25 million.
b. Value of consolidated gross assets at end of co’s financial year is less than $12.5 million.
c. The co (and its subsidiaries) has fewer than 50 employees at the end of the co’s financial year.
• A large pty co will have different financial reporting obligations to a small proprietary co (ss292-4).
Public companies
• A public co is one that is not proprietary (s9).
• May offer shares to the general public (must meet disclosure requirements in Ch 6D).
• May list on ASX if they comply with listing rules.
• Listed co’ is one included in the official list of a prescribed financial market (e.g. ASX).
- Minimum of 1 member (s114). Constitution (const.) is publicly available via ASIC.
On the facts, [Co] is a [pty/pub/etc.] [limited by shares/guarantee/etc.] and therefore [P/D]’s liability is…
…
DUTY TO AVOID UNDISCLOSED CONFLICTS OF INTERESTS
RED FLAGS:
• Drs entered into transaction and have personal interest in it or their duty to someone else clashes
• Profits made
• Competing
• Nominee directors
• Dr of multiple cos
• Works for multiple cos, uses info from A for work with B
NOTE: applied strictly – low threshold. Dr’s in breach may have also breached best interests/GF.
Step 1 – General Law
There is a fundamental rule of equity that a person in a fiduciary position must not (a) place themselves in a position where their duty and own interests may conflict (Boardman) or (b) make an unauthorised profit from
their position (Regal).
(a) Conflicts Rule
RULE: a fiduciary must not occupy a position where there is a ‘real and sensible’ possibility of conflict between personal and co interests (unless co permission is obtained) (Boardman).
ASK: would a RP think there is a such a possibility (Boardman)? – practical approach.
Consider whether co is deprived of dr’s impartial deliberation.
Fiduciary = drs (Regal; Aberdeen) and senior employees (Vic Uni).
Duty is strictly applied: irrelevant whether dr acts honestly/co profits (Boardman; Aberdeen).
Breach arises whether dr’s undisclosed interest in the K is direct or indirect – indirect: dr is a dr/SH of another co who contracts with the co (Transvaal).
Examples of breach (without SH approval):
• Act contrary to any express or implied agreement, including an employment agreement
• Arrange for co to not pursue opportunity then pursue it yourself
• Not acting in private capacity
• If dr (in personal capacity) enters contract with the co = automatic breach (Aberdeen – dr entered into K with partnership where he was partner = breach: co wanted lowest price, partnership wanted highest)
• Cannot misappropriate co’s property (incl. info and opportunities) (Cook)
Person can work for multiple cos, provided confidential info belonging to one co is not given to the other (Cott) If dr is dr of two companies transacting business: no breach provided dr discloses the conflict and abstains from discussion/voting (Fitzsimmons). Resignation will also suffice (Fitzsimmons).
Taking a corporate opportunity can lead to breach (Peso; Cook).
Not a breach if co rejects an offer, for P to take it up in private capacity (Peso).
Disclosure
Dr’s may take up corp op if they make full disclosure to SHs at GM and obtain their consent (ratification).
• Need disclosure to board and fully informed consent of SH (Regal)
• Mere disclosure and abstaining from voting insufficient (Transvaal)
• Sometimes resignation is only step dr can take to ensure duties performed (Fitzsimmons) Outcome
The contract will be voidable subject to equitable bars to rescission. Equitable remedies apply.
[P] will argue that in [D]’s position as [__] doing [__], there was a ‘real and sensible’ possibility of conflict between personal interest [of__] and co interests [of___] and co permission was not obtained (Boardman).
Boardman v Phipps
FACTS B was the solicitor of the plaintiff [trustees of the will of Phipps]. P held shares in a company named L
& H. After visiting the GM, B and TP (P’s son and one of the beneficiaries) saw financials of L & H, and determined to purchase the rest of the shares (no approval). With full knowledge of trustees, B and TP purchased a majority of shares. No fully informed consent of all the beneficiaries. Liquidated the company and benefited greatly. P brought proceedings alleging that the Defendant held profits received on a return of capital on shares obtained in L & H as constructive trustees of the estate.
HELD o In breach – B and TP would have to account for their profits – ‘real sensible possibility’
o When acting in a fiduciary capacity, any knowledge that is obtained becomes the property of the principal. One can only profit of such knowledge with express consent of the principal, regardless of whether the principal itself is unable to profit from it in any way or if the principal is going to benefit from it as well. That B and TP had best intentions and L&H profited irrelevant. Trustees vulnerable to fiduciary position.
Cook v Deeks
FACTS Co to construct railway lines – 4 drs and 4 SHs – Mr. Cook was one of them; the others didn't like him – New op coming up, all SHs except Cook decided to form new co to put tender in.
HELD o Breach – info/op belongs to co. New co did not have property rights over the info Green v Bestobell Industries
FACTS Green was senior manager of co (got experience with tenders). Green resigned and incorporated a co (submitted a tender for a project on behalf of his private co). Private co successful, old co failed in tender.
HELD o Breach. Duty owed to old co. Co need not suffer loss Furs v Tomkies
FACTS T was MD of Furs, had special knowledge of its formulae. Furs asked T to negotiate sale of the business for 8,500 plus 4,500 for formulae. Potential purchaser said it would buy business if T agreed to work for them. T disclosed this to the board who advised him Furs could not afford that. Purchaser hired T, issued him shares and payed him an extra 5,000. Because T promised to provide info of formulae, purchaser paid only 8,500 for business and nothing for formulae. After sale of business, Furs discovered this.
HELD o Breach. T to pay Furs undisclosed profits made. Rule is inflexible
Transvaal Lands Co v New Belgium (Transvaal) Lands & Development Co
FACTS S was a dr of Transvaal. S was also a dr and SH of another co (undisclosed). S convinced Transvaal to buy shares in the other co. Transvaal found out about S being dr and SH, sought to have K rescinded HELD o Breach – even though S did not vote on board’s res to enter K.
On the Street v Cott
FACTS C employed as editor and acted as director of company that ran “On the Street” magazine.
Implied term in her contract saying she had to serve exclusively. Governance rules required written resignation of directors. Could resign as editor through oral notification. Orally resigned as editor 07.09.90. Written resignation as director 18.09.90. Commenced at competing business in between.
HELD o She was non-executive director in interim. Obligations as exec dr ended 07.09.90.
o Did not disclose confidential information. Didn’t act contra constitution. No breach of express or implied agreement
Fitzsimmons v R
FACTS F - director of Duke. Appointed to board of Kia Ora. D had financial problems. As director of Kia Ora, F participated in transaction where KO paid D and D bought shares in KO.
Should F have disclosed information to Kia Ora?
HELD o F argues: had duty of confidentiality to D as a director. Could not be under obligation to Kia Ora to disclose the information.
o Court rejects argument: but not much guidance on what dr should do in such a situation. At a minimum, recognised that F should disclose conflict of interest and absent himself from participation in deliberations and the vote. It was the pursuit, not existence of conflict, that was problematic. F pursued conflict by failing to disclose true financial position of D to drs of KO. Situation only arose because F accepted appointment to KO board – could have avoided situation by not accepting appointment when conflict would have been clear.
(b) Profits Rule RED FLAGS:
• Taking up a corp opportunity
• If q asks if SH’s are required to hand over profits to co
RULE: a fiduciary must not use their fiduciary position or opportunity/knowledge gained from it to make an undisclosed personal gain (Regal).
Fiduciary = drs (Regal; Aberdeen) and senior employees (Vic Uni).
Irrelevant:
• that the co cannot exploit the opportunity (due to lack of resources etc) (Regal)
• whether dr made a profit (Regal)
• that the co did not suffer loss (may have even benefited)
• if the transaction was fair from the co’s point of view
• if making profit for personal gain, someone else or another co (Regal)
The duty will survive dr’s resignation where (Canadian Aero):
1. Resignation was prompted/influenced by personal ambitions, or
2. One’s position with co rather than a fresh initiative led to the opportunity Regal (Hastings) Ltd v Gulliver
FACTS Regal owned a cinema. Took out leases on two more, through a new sub, to make an attractive sale package. Landlord wanted them to give personal guarantees – did not want to do that.
Instead LL said they could up share capital to £5,000. Regal put in £2,000, but couldn’t afford more (could have got a loan). Four directors put in £500, Chairman got outsiders to put in £500.
Board asked the co solicitor to put in last £500. Sold business and made a profit of nearly
£3/share. Buyers brought an action against the dr’s – profit was in breach of their FD to the company – no fully informed consent from the shareholders.
HELD o Directors had to account for their profits to the company as they made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office” – could not take up opportunity
o Directors need shareholder consent. “The liability arises from the mere fact of a profit having, in the stated circumstances, been made” (Lord Russell)
Industrial Development Consultants Ltd v Cooley
FACTS C – IDC architect & MD. IDC miss out on gas board K. Offered K to C. C told board he was speaking to them in private capacity, even though IDC MD. C tells IDC board he is sick & wants early release from employment K. They accept. C takes up gas board K. IDC find out and sue.
HELD o Roskill J: irrelevant that unlikely IDC would get contract even if C had complied with his duties. Irrelevant that opportunity communicated to C in his personal capacity rather than as director during negotiations. C put himself in conflict position by dealing with gas board while still acting as MD. Info. should have been passed on to IDC.
Canadian Aero Service Ltd v O’Malley
FACTS C engaged in topographical mapping. Mr O was CEO and Mr Z was Exec VP. C learned that Canadian government might grant financial assistance to Guyana to have some mapping carried out in that country. Mr Z visited G a number of times and made various presentations on how the mapping might be done on behalf of C. O&Z resign & form Terra Surveys. Mr O approached Canadian government and said new co was interested in the work and they were invited to bid along with four other companies, including C. Terra Surveys win contract. Canaero sue.
HELD o Couldn’t obtain for themselves property or business advantage belonging to co or that it was actively pursuing. Not relevant that co could not have obtained contract.
o Fiduciary can’t divert to themselves or another co with which they are associated a maturing business opportunity which the co is pursuing - even after resignation where pursuing opportunity sought by co or where was position in co, rather than a fresh initiative, which led to the opportunity. Relevant factors:
Factors in assessing whether fiduciary used their position/knowledge to make personal gain (Canadian Aero):
• Position/office held
• Nature/ripeness/specificity of the corporate opportunity
• The fiduciary’s relation to the opportunity – did opportunity come to fiduciary solely by virtue of their position (Regal)?
• Amount of knowledge possessed and circs in which it was obtained
• Whether the knowledge was special/private; or merely publicly available (Peso)
• The length of time between the resignation and the new endeavour
• The circumstances under which the relationship was terminated (resignation, retirement or discharge) NOTE: re: permitting dr to benefit – only members in GM can ratify a breach (Regal) unless board represents all SH’s (QLD Mines). Requires fully informed consent of SH’s (Regal) – mere disclosure and abstaining from voting insufficient.
[P] will argue [D] has breached this duty in his/her role as fiduciary by [APPLY FACTS] and that this amounts to using their position or opportunity/knowledge gained from it to make an undisclosed personal
gain (Regal).
Outcome
The contract will be voidable subject to equitable bars to rescission. Co may seek equitable remedies: injunction, constructive trust, account of profits, equitable compensation.
Ratification may provide a defence of sorts. But cannot ratify if:
• Members not given fully informed consent;
• Ratification found to constitute oppression of minority;
• Company becomes insolvent;
• Acts are illegal or beyond company power (i.e. issue shares for improper purpose);
• Acts represent misappropriation by directors of company property.
• SHs cannot release drs from stat duties imposed under stat law: Carabelas. May affect penalty imposed.
We must now consider ss182/3 which have effect in addition (not derogation) to any other law (s185).
Peso Silver Mines Ltd v Cropper
FACTS C - MD of Peso. P approached by Dickson to sell mining claims. P board refused because had limited finance at the time and was receiving 2-3 similar offers a week. Consulting geologist of P suggests he & C buy D’s claims. Together with 2 others, they buy claims at same price offered to P. 2 years later change in control of P – C had to disclose his interest in the syndicate to board. C dismissed when he refused to transfer his interest to P.
HELD o Held: C did not have to account to P for opportunity – C not acting as a dr – private capacity.
o D offered claims to P and C had duty as dr to take part in the decision of the board. C acted in good faith, solely in the interests of P and with sound business reasons to reject the offer.
o Offer to P not accompanied by confidential information. C, as director did not have access to confidential information by reason of his office.
o When C was approached later, it was not in his capacity as a director, but as an individual.
QLD Mines v Hudson
FACTS H - MD of QM. Formed to acquire/exploit uranium mining options. 49% shares owned by company controlled by H (AOE) and 51% by company controlled by Kormann (Factors). In absence of uranium opportunities QM involved in iron ore mining. H&K approached Tas Govt to apply for mining licence.
H used resources and good name of QM in negotiations but formal application made in own name as intended to form new co for iron ore mining. When licence issued, finances of K and Factors were in crisis. Meeting held where K told other co-venturers (H and chairman of QM) that he couldn’t finance project. K and Chairman tell H okay for him to form new company to use licence. H resigns as MD of QM to pursue iron ore project. Remained dr for 10yrs. QM claimed account of H profits from project.
HELD o No breach: either because co, by rejecting opportunity had put it outside scope of H’s relationship with company, orbecause company had given fully informed consent for H to go ahead.
o But in this case board represented all SH, therefore may argue it was approved by SH.
