Directors’ duties in Australia and US Essay Example
DIRECTORS DUTIES IN AUSTRALIA AND US 16
Directors’ duties in Australia and US
30 April 2011
Company Law and Directors Responsibilities in Australia
Source of company law in Australia that govern the duties and responsibilities of directors emanate from three major areas, namely judge-made law (common law), statute law, which incorporates, the Corporation Act 2001 and lastly the company’s constitution. In Australia, the directors duties are designed with a sole purpose of promoting good governance and ensuring that the interest of the company are uphold by the directors while executing their obligations. This implies that the directors should put the interests of the company ahead of their personal interests. These paper explore the duties, responsibilities and obligations of directors in reference to the judge-made law, statutory law such as a duty to act (bona fide) in good faith as well as in the company’s interest as a whole, duty not to act for an improper purpose, duties of care and diligence, duty to avoid conflict of interest, duty not to make improper use of position, duty not do make improper use of information and duty not to trade while insolvent.
Common law/ statutory duties
Duty to act in good faith (bona fide) in the company’s interest as a whole
Chapter 2D, Section 181 of the Corporation Act and the common law maintains that a company director have to pursue their obligations in good faith as well as striving to achieve the interest of the whole company. The concept of good faith is subjective, therefore, it is a measure based on the level of honesty or good faith. Directors fail to compile with the duty when they in their own minds are not in a position to provide a proper consideration in regard to the company’s interests. This is usually witnessed in a scenario where the company’s and directors interests correspond; hence, they (the directors) cannot view their interests as a totally different entity.
Nonetheless, the above subjective test has got some qualifications. It imports a certain degree of objective standard, that is, what is rational in the eyes of a purposeful onlooker, of whether an honest and intelligent individual in the position of a company director could in the prevailing circumstances believe rationally that the transactions executed were in the benefits of the company (Tomasic, 2002). Therefore, in circumstances where the director does not consider the interest of the company in his/her own mind, although the transaction pursue is typically in the interest of the company, the duty is said not to be breached. For, the director to fully take into account the interest of the company he/she should consider the shareholders of the company as a collective group. However, companies that is insolvent or that is at the edge of being insolvent the interest of the creditors are considered.
Duty not to act for an improper purpose
Chapter 2D, Section 182 of the Corporation Act ,as well as the judge-made law, stipulates that, since directors have powers that are vested on them they should not exercise such powers for an unacceptable purpose. This incorporates obtaining personal advantage and through the creation of a fresh majority via issuance of shares that are centered on personal interest that will counter the voting power of the present shareholders. An appropriate purpose is considered to be pursuing a genuine and favorable commercial opportunity or raising of company capital.
An objective test is conducted to establish whether the director exercised his/ her powers for an improper or proper purpose, for instance, in a case of money borrowing, the supposed need for borrowing of the company is looked at deeply. Therefore, the company can nullify the corporation action in circumstances where a director us his/her power for an inappropriate purpose.
Duties of care and diligence
The Corporation Act, Chapter 2D section 180 and the common law are of the opinion that company directors should be fully informed about the actual financial position of the company as well as the solvency. The duty does not diminish is circumstances where the director delegate responsibility. Directors cannot use their own made ignorance about the company’s financial position to negate the duty. This implies that the directors have the right to question every information place on his table so as to ensure that the information truly represent the actual position of the company and not only take what is developed by the company employees. For instance, if a company director accepts a balance sheet that did not agree, failure to ask for correction will be a breach of the duty of care and diligence. The company director should at all time make decisions judgments that are independent and informed that are tabled with the board of directors. The directors are supposed to assume the position of guiding the company and monitoring its management (Hicks, 2008).
Duty to retain discretion
Company directors in Australia are expected not to place themselves in situations that will limit them in making decisions that fully puts into consideration the company’s best interests. For instance, being part of a business transaction that will limit them from making decisions that are company centered, this incorporates decisions that will put forth the interests of other parties leaving the company’s interests to lag behind.
Duty to avoid conflict of interest
Section 191 (1) (2) of the Corporation Act and the judge-made law stipulates that company directors have duties termed as fiduciary duties that they owe their respective companies. It forms the basis of a duty of utmost good faith and trust as well as an essential legal relationship. Here, the directors are expected to put the company’s interests ahead of their personal interests. This necessitate that directors should not put themselves in situations that will in the future leads to a conflict of the company’s and personal interests. The directors are thought to look after the interests of the company; hence a conflict will possibly occur. The conflict of interest that results can either be direct or indirect. Therefore, a company director is supposed not to have a personal interest with a transaction that is related with the company. The breach of duty is witnessed in a context where the company director enters into a contract with the company or a different company where the director is a shareholder or director is contracted by the current company where he/she is serving as a director. However, the company’s constitution stipulates two qualifications where the interests can be considered such as the express provision and full disclosure and approval of the constitution (Cahn, 2010). Therefore, in circumstances where the director does not consider the above two qualification, any contract entered with the company that has vested personal interest will be regarded null and void by the company through proceedings that are initiated by the board of directors.
Duty not to disclose confidential information
Section 183 of the Corporation Act and the common law together with the director’s fiduciary duties, the directors has a duty not to disclose information that is considered confidential. The information is accessed due to their position. Information are considered confidential only and only if the owner believes that any disclosure of the information would be detrimental to him or beneficial to other individuals, the information is secret, confidential and not in the public sphere and as per the company practice the information is gazed at as creditable of protection. The duty is breached when the company director disclose the information of the client or the supplier in circumstances where such information were given in confidence.
Duty not to abuse corporate opportunities
Directors are supposed to avoid as much as possible conflict of personal and company interests. This normally occurs when the Corporations Act of the company director is in aligned with the affairs of the company that are executed in the course of management, and in exploitation of knowledge and opportunities as director. It is essential to have a causal relationship between the opportunity and directors’ fiduciary role. It is of the essence to look at the circumstance under which the situation is founded, the scenery of the opportunity, the extent and nature of the operations of the company and its future operations. Therefore, if there is a connection between the director’s role and the opportunity it is an obvious indication of the mishandling of the opportunity.
Duty not to trade while insolvent
Part 5.7b Division 3.A of the Corporation Act stipulates the duty of directors in relation to insolvent trading. The director will breach this duty if at the time when the company incurred a debt he/she was a director, or there were grounds to imagine that the corporation was in debt or would become bankrupt due to the debt and he/she did not taken any necessary steps to prevent the company from incurring such debt (Baxt, 2005). The duty is aimed at safeguarding the interests of the shareholders and extending the responsibilities of directors. However, the Act provides for defense where the director had no otherwise in preventing the company from incurring the debt.
Section 285-318 of the Corporation Act stipulates that directors have a responsibility of maintaining directors’ reports and proper financial statements and records. This relates to the directors due of care and diligence.
Company Law and Directors Responsibilities in USA
This paper explores the legal duties of publicly owned corporations in United States of America. It gives a clear of what is to be expected from a company director. The duties of the directors are stipulated in the principles of law and federal securities laws of United States. The duties incorporate fiduciary duties such as duty of care, duty of loyalty and good faith and duty of disclosure (Mares, 2008).
Duty of care
This particular duty requires company directors to act cautiously in light of the entire reasonable information that are available in their execution and oversee of company’s business and the process of decision making. Therefore, directors should consider utilizing the certain practices which include; obtaining and considering all the relevant information, taking the necessary time to evaluate corporations’ actions, considering the advice of experts, understanding the terms of transaction, asking questions and testing as well as probing assumptions. In addition, the director should make deliberate decisions after an outspoken discussion; have a clear understanding of the company’s financial statements and monitoring any related controls, reviewing and monitoring the performance of senior officers and chief executive officers, as well as staying, informed about the company’s performance, operations and challenges and lastly, by implementing and monitoring information systems and reporting to the company’s failure to act in accordance with regulations and laws (Keay, 2007).
The directors does not breach the duty of care by failing to adhere to the best practices, however, the duty is breached when directors are involved in behaviors that amounts to gross negligence, they act recklessly so as to negate the shareholders concerns or they act irrational as far as their decision making process is concerned.
Directors are encouraged to take advice from experts such as attorneys, investment bankers and accountants whenever they are fulfilling the duty of care. Delaware law grant directors the opportunity to rely on expert advice provided that the reliance is in good faith and reliable. However, the director will not satisfy the duty of care if the information provided by experts is incorrect. Also, the selection of the experts should be done with care where the expert experience and qualifications are considered. It is important for the directors to consider the independence of experts for them to receive unbiased opinion. The directors, in addition, should not in totality rely on the findings of the experts; rather, they should test and probe the analysis, assumptions and conclusions of the experts (Tomasic, 2002).
The duty of loyalty
Company directors owe a duty of loyalty to the company and to its shareholders. The fiduciary responsibility of loyalty requires the company directors to carry out their corporation actions in good faith. In addition, they should act in consideration of the best company interests and its shareholders and to desist from getting inappropriate own benefits as a result of the legal relationship that exist between the director and the company. This duty of loyalty forbids directors from usurpation and self-dealing of company opportunities in the absence of an informed consent from the company through either its stakeholders or disinterested directors. The duty maintains that the interest of the company and its shareholders should take precedence of the directors own interest and not generally shared by shareholders. Typically, the duty of loyalty issues arises in a number of contexts such as; A conflict of interest where a company director has a vested interest in a dealing contemplated by the company, misappropriation of company opportunities where a company director explore an opportunity that were readily available for the company, competition with the company where the director establish a similar company without the consent of the shareholders, misappropriation of company assets where the director utilize company information and assets for non-company purposes and finally, egregious conduct. Unlike, the duty of care, liability in relation to a breach of duty of loyalty is not limited by the provisions in the company’s certificate of incorporation (Cassidy, 2006).
Duty of good faith
This forms a division of the duty of loyalty. It requires that company directors execute their responsibilities with a full consideration of the company’s and stakeholders interests. Nonetheless, bad faith does not imply negligence or bad judgment, but to a certain extent it entails doing a wrong consciously due to a dishonest state of mind or purpose. Circumstances which form the basis of breaching a duty of good faith include; Where directors deliberately and knowingly withholding relevant and material information with the intention of misleading stakeholders, a business dealing is authorized for reasons other than advancing company welfare and in contravention of the applicable laws, director’s decision was triggered by personal interests other than the interest of the company or its shareholders, actions were taken consciously with a moral obliquity or deceitful purpose and the directors failed to put in place necessary interventions to prevent self-dealing or waste by a corporate officer or another director.
Duty to disclose
In addition to the fiduciary roles of loyalty, care and good faith, directors of companies have a duty of candor or disclosure. Certain disclosure violations such omission and misstatements that occurs due to the directors erroneous judgment though executed in good faith amount to the breach of duty of care. Again, when the board of directors is deficient of good faith in the approval of a disclosure, the violation also incriminates the duty of loyalty. In circumstances where directors need to make a disclosure so as to seek company directors approval, Delaware courts maintains that the directors need to fairly and fully disclose all the relevant and material information that are within the confines of the board. Further, the court stated that, in situations where directors recommend stakeholders action, the directors have an affirmative duty of disclosing all the relevant and material information related to the requested action and to give a truthful, balanced account of all information disclosed during communication with shareholders. On the other hand, the directors are supposed to disclose to the company board any information that is best known to them which is considered relevant in the decision making process of the board of directors (Doyle, 2005).
According to the duty of candor, not all the information can be disclosed. With the consent of the company investors, disclosure of any relevant or material information should be accurate, truthful and complete. In accordance with the federal securities law and principles of law, information is considered material if there is a considerable likelihood that a rational stakeholder would consider the information important while making a decision on how to vote.
UK company director’s duties
Company directors in United Kingdom are appointed solely with the responsibility of running and managing companies. This is accompanied with a range of essential responsibilities, which are based, on individual abilities while others are a matter of statutory obligation. The United Kingdom company director’s duties have in the past evolved through the case and statute law. The company’s Act 2006 is founded on case law and maintains that company director’s actions should have company and its shareholders interest put forth in precedence of personal interest. Also, the actions should lead to the success and development of the company. In addition, the directors should not act in a manner that a conflict of interest will result between their own wishes or self-interests and the good of the corporation. The following are some of the duties stipulated in the Companies Act 2006 (Keay, 2007).
Differences in directors duties between USA/ Australia and UK
UK directors’ duties differ with those of USA and Australia since it incorporates additional responsibilities such as;
Duty to promote the success of the company
The success of a company is measured based on its ability to meet its stipulated target that include an increase in the long term value of the company. The targets are put forth in terms of objectives; therefore, company directors in reference to the set objectives have the duty of establishing a good faith judge and judgment of what constitute the success of the business. The directors will have to consider the constitution of the company, stockholders decisions and any other information that can lead to a fair judgment. The duty of the director is to ensure that success attained benefit not only the majority shareholders but also all the members of the corporation. Consideration of factors forms an integral part in the execution of such duty (Bonyhady, 2007).
Duty to exercise independent judgment
According to the Companies Act directors have a responsibility of making the final decision. However, this does not limit the director from seeking advice from different quarters provided the judgment is independent on the eyes of the director. This duty is said to be breached when the director negate any legal advice.
Similarities in directors’ duties between USA/Australia and UK
The USA, Australia and UK duties and responsibility are similar in that they all incorporate the following;
Duty of care
The company act strengthens the provision of duty of care in the common law. This particular duty requires company directors to act cautiously in light of the entire reasonable information that are available in their execution and oversee of company’s business and the process of decision making.
Duty to avoid conflict of interest
The Act sets out requirements that are necessary for the director to be involved in a number of directorship or engage in a business dealing that compete with the individual is a director, this will prohibit the resultant of a conflict. The duty will not apply if the existing situation cannot in the best of the knowledge of the director result in a conflict of interest. For instance, when the matter is reasonably outside the confines of the corporation business, no real conflict of interest will be witnessed.
Duty not to accept benefits from third parties
The companies Act provide that a director should not accept benefits of any kind from a third party. This applies to benefits that are granted on the ground what the director has done or not yet do. In addition, it prohibits the exploitation of the position of directorship for personal gains. This does not include benefits that are received from the company.
Duty to declare an interest in proposed arrangement or transaction
The director is obliged to declare any material interest in a particular transaction that the business intends to join. This will help the company in deciding whether to pursue that transaction or not (Clark, 2010).
The Australian Securities and Investment Commission’s (ASIC) is vested with the power of banning directors through an application for a declaration of the court. ASIC are in a position of disqualifying directors from their responsibility of managing corporations for a given period of time. The disqualification is as a result of a contravention of their statutory, general or constitutional duties. For instance, according to a statement of 2006, ASIC disallowed nine company directors of collapsed companies for their personal breaches, such as fraudulent and uncommercial transactions, engaging in business dealings while insolvent, failure to keep proper company’s financial records, failure to execute their obligations in the greatest interest of the corporation and its stakeholders and in good faith, failure to submit statutory taxes and failure to avail statements concerning company affairs to administrators (Mäntysaari., 2005).
ASIC v. Adler & Ors
Here, the main issue was a $10M payment that was done by an HIH subsidiary to a corporation whose sole director was Rodney Adler. Using a trust mechanism sum amounting to $4M was spent in the purchase of HIH shares, loans were granted to corporations that were associated with Adler and another purchase of unlisted investment were made from Adler’s other company. The above listed dealings were transacted without disclosure and the approval of the board and shareholders. The loans were advanced without proper security and documentation and payment made in a way that other HIH directors were unaware. It was held that Rodney Adler had contravened section 181(duty to act in good faith and for a proper purpose), section 182 (duty not to improperly use position), section 183 (duty not to improperly use information) and section 180 (duty to act in due care and diligence) of the Corporation Act (Harris, 2009).
ASIC v Rich
A telecommunication company known as One.tel in early 2001 was placed under voluntary administration, but later on July that same year it went into liquidation. The then non-executive chairman, Greaves, was accused by ASIC for breaching his constitutional duty of care. The accusation of Greaves was based on his position as the chairman of the board as well as audit and finance committees of the company. Greaves was found to have contravened the duty of due care and diligence based on his qualification and a handful of commercial experience and role in the company constituted the duties of a director (Cahn, 2010).
ASIC v Vizard
Mr. Vizard who was the director of Telstra by virtue of his position received confidential information. Mr. Vizard used the information improperly by basing the decision to sell or purchase shares on the decision so as to get a personal benefit from the transaction, an advantage for his established company and a trustee company where his family and he beneficially held shares. Mr. Vizard was found to have contravened section 183 of the Corporations Act, that is, the duty to desist from improperly utilizing information obtained by virtue of being a director. Therefore, a penalty and disqualification order was delivered by the court.
ASIC v Vines
Mr. Vines is believed to have contravened section 180 by failing to exercise due care and diligence through the provision of inadequate and misleading material information (sections 190-185) to the company’s board of directors. The disclosure violation is interlinked to issues that were within the personal knowledge of Mr. Vines, in situations whereby the board was strongly relying on him to make accurate, complete and timely disclosure of all relevant and material matters.
Sarbanes-Oxley Act of 2002
The Act was enacted as a counter measure of the prevailing scandals including those affecting Tyco International, WorldCom, and Enron, Adelphia and Pergrine systems. The scandals lead to the loss of huge amounts of money’s by shareholders due to collapse of share prices of the affected companies and also the public loss confidence on the securities markets. It resulted in far-reaching reforms, in the business practices of America. It strengthens the accounting controls of companies (Wei, 2003).
The Charitable Corporation v Sutton
The Charitable Corporation was established solely to advance loan fund to the needy, the case involved directors was accused of negligence and failure to administer loan procedures properly for the corporation resulting to a huge loss. It was maintained that a director owe fiduciary roles to the corporation relative to a trustee who owe to a trust.
In re Caremark International Inc. Derivative Litigation
Caremark International, Inc. shareholders accused the corporation directors of failure to set in place sufficient ICS (internal control systems) giving room for criminal offences being committed by employees. The court decision leads to a clarified understanding of when the duty of care is breached.
Model Business Corporation Act
Model Business Corporation Act (MBCA) came into being due states variations in defining corporation. The presence of uncertainty and variation lead to a number of lawsuits where a corporation promoter was personally sued for obligations presumably incurred even in the corporation name. The Act brought about some precision on such confusion as well as on the existing corporate laws.
The prevailing financial crisis is both the output of breach of the statutory duties of directors as well as a pathway for the collapse of a number of companies. When statutory duties are well executed by the directors the company is less likely to experience the financial crisis. The directors are being held personally liable by a number of directors for the loss they incur due to the breach of their duties by directors. Therefore, the legal and common responsibilities of the directors play a vital role in making certain that the market functions well. This is elaborated in the Companies Act 2006 where the main objective of the Act is to come up with ways in which management strategies are minimized so as to reduce the likelihood of a market failure. Breaches of the statutory duties by the directors are likely to lead to collapse of companies hence worsening the current financial crisis. The judgment of directors should be in the interest of shareholders and creditors so as to ensure that the crisis is not exaggerated. To this end, breach of a statutory duty leads to a worse situation for the company, its shareholders and the economy as a whole.
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