Types of Companies (Class 2)
Proprietary (s113, s45A) See also Class 3
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No more than 50 non-employee members
can’t engage in activity that needs disclosure under Chapter 6D
limited by shares or unlimited with share capital
Small (s45A (2))
Large (s45A (3))
At least 1 director (s201A (1))
Advantages – see Class 2 (9)
Public (s9)
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a non proprietary
At least 3 directors (s201A(2))
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Can be listed or unlisted
Partnership (See Class 3)
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limited size
Unlimited liability (in NSW?)
Company (Class 5)
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1 member is enough to form a company (s114)
Company is separate from its members (s124)
Registration (Part2A.2)
Contravention of mandatory provisions is an offence (See Sch3)
Separate Corporate Personality (Class 8)
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Salomon v Salomon: company is separate from its officers and members
Limited liability – ordinarily, members’ only obligation is to pay the initial price or
the par value – also look at benefits/costs (point 6 Class 8)
Rules for lifting the veil:
- Device, cloak or sham to avoid legal obligations (Gilford Motors p153 and Jones
v Lipman p155)
- Agency (Smith Stone and Knight p156)
Personal liability of officers for breaches by the company (ss181-182)
Corporate Groups: For definitions see Class 9 handout
- Briggs showed that complete control of one company over another is
not reason enough to pierce the veil
- No unifying principle  have to look at the facts
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Board of directors
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manage or direct the management of the company (s198A (1)) – different for
proprietary s198E – mandatory
s201B  no formal qualification requirements
cannot exercise powers that the Law or the constitution gives to the GM
(s198A (2))
regarding dividends (s254U)
can delegate powers to anyone (s198D (1))
can start external administration (pp224-225)
cannot fix their own remuneration (p224)
have right to info for:
- legal proceedings (s198F)
- generally (s290)
exercise their powers at a meeting (pp279-281)
GM / Members (as to the role of the GM see Class 7)
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has residual power, ie if the Law or the Constitution does not say who is authorised,
the general law gives the power to the GM by ordinary resolution (usually displaced
by s198A(2))
get the power if the Board is unable to act (p223)
cannot direct the board re management (s198A (1))
appoint or remove person as a director (s201G) and (ss203C-D)
determine remuneration (s202A – replaceable & Part 2E)
authorise payments of fin. benefits to related parties (s208)
appoint/remove auditors (ss327, 329 – mandatory)
by special resolution can:
- alter the company’s name (s157)
- change the type (s162(1)
- adopt, change or alter the Constitution (s136(2))
- “bona fide for the benefit of the company as a whole” - rejected
(Gamboto, p617)
- Pt6A.2 overrules the provisions in the constitution and sets out the rules
for compulsory acquisition of 10% or less remainder of shares
- Proper test is that an alteration will be valid unless:
- ultra vires
- beyond any purpose contemplated by articles
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- oppressive
- where alteration amounts to expropriation, company must show:
- the alteration was for proper purposes
- it is not oppressive to the minority
convert shares into smaller/larger number by ordinary resolution (s254H)
reduce capital or approve a buyback of shares (ss256-257)
alter rights attached to shares (Pt 2F.2)
Ratify breaches of duty (Class 17)
Management
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Managing Director can get all the power of the directors (s198C (1))
Informal Corporate Acts (See class 5 points 5-9)
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a third decision making process, where all shareholders expressly or
impliedly waive all formalities
unanimous agreements are binding when GM has the power
shareholder agreements are binding on shareholders
Constitution and Replaceable Rules (ss135-141)
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constitution and replaceable rules apply like a contract between company,
members, directors, secretary etc (s140(1))
constitution can modify delete the Rules (135(2))
failure to comply with the Rules is not a contravention of the Law (s135 (3))
Corporate Crime (Class 10)
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Primary responsibility
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for the mens rea look at the “Directing mind and will”
what actions by individuals will attract company’s liability
Tesco defence  if management exercise due care and diligence
Trade Practices Act (attached to Class 10)
Ancillary liability (s79)  involved
Vicarious liability
Penalties (s1311)
- definition of Civil penalty provisions - s1317E
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ss181(2), 182(2), 183(2) and 209(2) – application of civil penalties to those “involved
in a contravention”
Related parties (Part 2E) (Class 20)
- Protects members as a whole (s207)
- Public companies cannot give financial benefits to related parties, w/o member
approval (s208)
- Exceptions are in ss210-216
- If not an exception, then must obtain approval under ss217-222
- Company is not in breach (s209(1)(b))
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Individuals “involved” are in breach s209(2)
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“involved”  see s79 – very broad
Authority of Corporate Officers (Part 2B.1 and 2B.2) (Class 21)
- capacity of directors and officers to bind the company in transactions with
counterparty
- policy  higher risk leads to higher transaction costs
- company can enter into contract:
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through officer with actual or implied actual authority (s126(1))
with or w/o affixation of the seal or by deed (ss126(1), 127, 129(6))
actual authority is derived from the Law or the Constitution (Freeman p288)
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authority of the Board  s198A
- exercised at a duly convened meeting
- recorded in the minute book (s251A)
- gives actual authority to specified officers
- managing director  everyday matters
- Chairman  the office itself does not give authority, but it could be implied
from the conduct of the parties (Hely-Hutchinson p289)
Assumptions others can make s129:
- Company must inform ASIC regarding its directors s205
- Constitution and replaceable rules complied with
- Director or secretary, who is held out by the company to be one is
- Duly appointed
- Has authority and powers of those in his position
- Same for officer or agent
- They properly perform their duties
- Duly executed if signed under s127(1)
- If has the authority to issue a document, then can also certify it is genuine
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Can make assumptions despite fraud by officers or agents (s128(3))
Can’t make assumptions under s129 if:
- Had actual knowledge of a matter that prevents that person making
that particular assumption (s128(4)) Brick and Pipe
- or suspected they are incorrect (s128(4))
- this is different than the “out on inquiry” common law test
- can’t make an assumption in s164 (???) if had a connection with the company, which
prevents making such a connection
- For the equitable equivalent see Class 21(7)
- Turquand  dealing in good faith, can assume internal management has
been complied with
Constructive Notice is abolished in s130(1)
Duties of Directors
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Fiduciary duties
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are proscriptive, ie what you should do
they are about the process
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Duty to act in good faith in the best interests of the company as a whole (Class15)
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Directors as “fiduciaries”
Duty of loyalty
Activated when the fiduciary seeks to advance their own interests at the expense of
the beneficiary
A director may not profit from the breach, even if the beneficiary is not deprived
This duty to act has the following components:
- In good faith
- It is about honesty
- See test in Smith and Fawcett (p422)
- Must have reasonable grounds for that belief (Tech v Millar p445)
- Give weight to bona fide opinion of directors (Howard Smith p450)
- A lot of decisions are in good faith but could be:
- For improper purpose
- Not for the benefit of the company as a whole (Howard
Smith, Tech, Norbrick Kinsella)
- For a proper purpose
- Diluting voting rights is improper (p452)
- In the best interests of the company as a whole
- In a corporate group must look at the interests of your company
(Walker v Wimborne p475)
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Reasonable director in the position reasonably believe that it was in
the interest of the company p478 Charterbridge
- Very hard for the court to find against the best interests of the
company if directors act on advice and stick to their plan (Tech)
Non intervention principle (Harlowe’s Nominees p419)
Also, statutory duty of good faith (s181)
- In good faith in the best interests of the corporation
- For a proper purpose
Context – see Class 15 (5)
Remedies:
- For general law duty
- Agreements or acts undertaken in a breach of duties  agreement or contract
is voidable (Howard Smith)
- Injunction can be ordered to prevent breach of s181
- Accounts of profits or constructive trusts imposed  Chan v Zacharia CB22
- Equitable compensation for losses sustained (Warman v Dwyer)
- need to elect account of profits or compensation
- For s181 duty
- Civil penalty provision
- s1317G pecuniary penalty
- Compensation order s1317H
- Power of DQ s206C
- s1324, injunction
- Contravention extends to those involved, s181(2)
- Criminal provisions (s184(1))
- Actual subjective awareness of dishonesty
Duty to avoid conflicts of interest Class 17 (s190-196)
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To act in the best interests of a beneficiary must not have a conflict of interests
For general principle look at Chan v Zacharia p25
Equitable principles as modified by constitution, replaceable rules and ss190-196, 2E
For equitable duty:
- Equitable remedies arise where there is a “significant possibility of conflict”
b/w the fiduciary duty to act and a personal interests (Chan p25)
- In multiple directorships, its mere existence is not enough, need actual
pursuit of the interest where there is a “significant possibility of conflict”
(Fitzimmons v R, Chan)
- Duty to act honestly is not diminished by duty of confidentiality to
another company
- The fairness of the contract does not affect the right to remedy
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- But for duty in s208 there is an arm’s length exception under s210
- No remedy if the benefit or gain approved by the GM (Imperial Mercantile
Credit Association p499-500)
- Level of disclosure  Fitzsimmons v R
- May have to resign if actual pursuit is involved (ibid)
- Right to rescind only if restitution is possible
- Right to obtain account of profits  need actual pursuit (Fitzsimmons)
- Right for equitable compensation for losses (p510)
- Equitable remedies are subject to estoppel…
- Profits are assessed by reference to “the scope and ambit of director’s duty”
 Warman
- Equitable duty is modified by the Law (statutory duty)
- Breach leads to a fine under s1311 (5 penalty units)
- s191 and s192 are in addition to general law (s193)
- Must disclose “as soon as practicable” (s191(3)) to the board of the
“material personal interest in a matter that relates to the affairs of the
company”
- Exceptions are in 191(2)
- Failure to disclose can go to “good faith”  s181(1)
- For proprietary companies:
- ss191, 194 (replaceable rule)
- have to disclose
- can vote
- can keep profits if prior disclosure
- company can’t avoid transactions simply because conflict
exists
- For public companies
- ss191, 195
- director cannot vote or be present if “material personal
interest”  “substantial likelihood that, under all the
circumstances, the interest would have assumed actual
significance in the deliberations” p495
- director cannot be used to establish quorum
- board can, by resolution, state that it should not disqualify
- ASIC may exempt (s196(1))
- Constitution can add restrictions
Duty to avoid conflicts of interest in dealing with related parties (Class 17)
Secret Profits and Corporate Property, Info and Opportunity ( Class 18)
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Fiduciary duty
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Statutory
- Misuse of office (s182)
- Misuse of info (s183)
- Criminal offences (s184)
- Prohibition of giving financial benefits to related parties (Pt 2E)
- Must disclose info under s191
General Law Chan p25
- Factors relevant to finding of a breach see Canadian Aero p555
- By reason of position arising out of fiduciary duty
- Where there is a conflict of interests
- Test is two-fold (Cook v Deeks)
- Is there a conflict?
- Is there a sufficient nexus b/w conflict and profit?
- Two rules (Cook v Deeks p531):
- Cannot take away the opportunity from the company  it is your
primary duty
- Cannot ratify, if :
- have control of the GM
- where oppression of the minority (s232)
- Must disclose all relevant info to the board to so that the board can give its
“fully informed consent” – p557-558
- From Boardman v Phipps:
- Should not make a profit through a position of fiduciary w/o
the informed consent
- Should not act in a way, that there is a conflict of interests
- Real sensible possibility of conflict
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Can keep the profits, if the were fully informed the
beneficiary and received consent (p557)
Disclosure insufficient as in Cook v Deeks
Remedies:
- Right to an account of profits (Cook v Deeks)
- Equitable compensation (Ford)
Kinds of opportunities not to be exploited  Class 18(6)
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Duty of Care (Class 11) s180(1)
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these are about identifying sub standard decisions
A director is bound to take care in the performance of his office (handout Class 11 Daniels)
- Objective - “reasonable care”
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Subjective – skills that the director holds out as having
- Size and business of the company
- executive directors have higher standard than non executive
- no reference to experience or qualification for the statutory
duty
become familiar with the business of the company (Daniels p390-391)
have to ask the hard questions
guide and monitor the management of the company (Daniels p388-391)
- attend board meetings, unless exceptional circumstances
- keep informed about the affairs
make business judgements on the basis of info that you have or should have
business judgement rule (see class 14) defence (s180(2) is effective for statutory,
common law and equitable duties of care
- rebuttable presumption that directors have made a business judgement with
due care and diligence unless one of the relevant characteristics is missing
(S180(2))
- even if rebutted, must still prove breach
- rational for it is:
- for directors, who act fairly and honestly
- reduce agency costs
- encourage appropriate risk taking
- but there was a similar common law rule in AWA p380
- Remedies are:
- Common law  damages
- Equity  equitable compensation (PBS v Wheeler)
- s180(1)  civil penalties provision
- civil penalty order s1317G, H, J(1)
- order not to take part in management s206C
- claim for damages by the company s1317H, J(2)
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Duties in Corporate Groups ( Class 16)
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Economic entity and legal entity are different
Question is, when would a decision for the benefit of an economic entity be
“improper purposes”
s187 specifies when directors can act for the benefit of the economic entity
Northside Developments  a company, which is part of the group can benefit
directly or indirectly p301  must show incidental benefits to being a member of a
group
Have to look at how closely related the companies are Walker v Wimborne and
Equicorp
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Duties to individual shareholders (Class 19)
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Levin v Clark  can redefine the interests of the company in the constitution
Where the directors don’t even consider the interests of a subsidiary  look at what
decision would have been done if they did (PBS)
no duty to individual shareholders merely because of the directorship (Coleman v
Myers p575)
rational is that interests are very wide, can’t and shouldn’t try and satisfy everyone,
thus, by becoming a member  forgo some of the rights
the existence of it will depend upon the circumstances of each case
- some factors include (ibid p576):
- dependence upon info and advice
- existence of r/p of confidence
- the significance of the transaction
- extend of the positive actions of directors to promote
Insolvent Trading (Class 14) s588G
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offence created when a debt is incurred by an insolvent company (Point 11 Class 14)
defence is in s588H
remedies:
- court compensation orders s588J,K
- recovery by liquidator s588M
- recovery of debt by creditor ss588R-U
- civil penalty provision s1317E
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Exemption, Indemnification, Insurance and Ratification of Breaches
s199A,B (Class 19)
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Modification (Whitehouse v Carlton)
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Exemptions s199A
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Can reduce or modify director duty in good faith
Removes some of the facts from being a breach to begin with (Miller)
Should not exempt from liability to the company as an officer
Neither majority or minority can sue the director, but others, like ASIC can
Indemnification s199A(2)
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Cannot indemnify for (except for legal costs):
- Liability owed to the company
- Liability from pecuniary orders under s1317G or compensation under
s1317H
- Liability to some other party, where acting not in good faith
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Insurance s199B
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Indemnification for legal costs  see s199A(3) and Class Notes 19
Due to indemnification there is a greater scope to recover money
Cannot pay insurance for:
- Contraventions of ss182, 183
- Wilful breach of duty
Ratification of Breaches Pt2F.1A s239
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Can ratify where resulting contract or agreement is voidable  had the power to
enter, but exercised it acted in breach
Affects standing in s239
Relieves of liability, but does not affect the existence of a breach
Works like estoppel against the minority (Bamford v Bamford)
Company waives the right to sue
It is not a blanket cover, has to be specific
Does not prevent standing for actions on behalf (s239)
7 instances, where ratification will be given no weight:
- 1) standing, s239 (only limited weight s239(2))
- 2)fraud on the minority
- 3) misappropriation of company resources
- 4) by insolvent companies
- 5) defeat personal rights
- 6) oppression
- 7) improper purpose
- 8) criminal conduct
Standing and Shareholder Remedies (Class 12)
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Personal Actions (Class 22)
- Right of shareholders to bring an action to assert personal rights, arising out of:
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The constitution
- Constitution is a contract s140(1)
- It can’t confer rights on outsiders
- Will only confer personal rights where breach can be seen as a wrong to
a specific shareholder, not company as a whole
- Right to vote
- Pre emptive rights in the articles
- Right to obtain notice for general meeting (s249J)
Special majorities s136(2) p627
Equitable right of voice
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Dilution of voting rights (Class 22)
- Personal right to prevent it due to improper exercise of power by directors
(Howard Smith p445)
- An equitable right out of membership of a company (Residues Treatment)
- Cannot be common with all other shareholders
Oppression (ss232, 323) (Class 23)
Gamboto principle (see alteration of constitution above)
Standing to bring action continues at least until ratification, but since s239 extends
thereafter
Oppression (Class 23) Part 2F.1 ss232-235
- Conduct “oppressive to, unfairly prejudicial to, or unfairly
discriminatory against member or members” (s232(e))
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“a visible departure from the standard of fair dealing…” p675
Wade p684
- “whether reasonable directors, possessing any special skill,
knowledge or acumen possessed by the directors and
having in mind the importance of furthering the corporate
object on the one hand and the disadvantage, disability or
burden which their decision will impose on a member on
the other, would have decided that it was unfair to make
that decision”
Who can apply  s234(a) – very broad
- A member
- In the capacity as a member or any other capacity
(s232(e))
- ASIC s234(e)
- Need not have been a member when the conduct
occurred (Spargos Mining)
Must be conduct in relation to the company
For examples see Class 23(7)
Remedies:
- Any order that the Court considers appropriate s233
Further developments:
- Limits on majorities in relation to alterations of articles
(Gamboto p617)
- Limits on capacity of majority to ratify breaches (Miller)
Actions “on behalf”
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general law action on behalf, ie rule of Foss v Harbottle is abolished (s236(3))
- exceptions to this rule were “fraud on the minority” (Class 12)
- interests of justice (Class 12)
- where special majority was required (p627)
- personal actions are not really an exception
statutory right is under s236(1)(a)
- can be brought by members, former members and officers of the company
- Standing:  the Court will grant application if (s 237(2)):
(a) company won’t bring the proceedings itself
(b) acting in good faith
(c) it is in the best interest of the company to grant leave
(d) there is a serious question to be tried
(e) either gave notice or it is appropriate to proceed w/o it
- this ensures that the management/board decisions are not easily reviewable,
ie you have close, responsive decision making process
- Note rebuttable presumption as to the best interests of the company s237(3)
- Ratification it to be taken into account and it goes as to the interests of the company
(s239)
- Court can give very wide orders (s241)
- Costs are dealt with s242
Competing Models of Corporation (Class 13 – see notes)
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Courts have a model in mind, when reach a decision
Time Warner – look at long term strategic view
Blair & Stout “A Team Production Theory of Corporate Law”
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Traditionally, a Grand Design Principle Agent Model:
Principal (Shareholder)  Board  CEO (Agent)  Managers 
Employees
- This is a nexus of contracts
- Shareholder value maximising
Want a Team Production Model
- horizontal relationships with the board at the top, which supervises the
overall activities of tam members
- participants give up some of their rights to make investments into the
company (time, money, intellectual property)
- this is a nexus of investments
Allen “Our Schizophrenic Conception of the Business Corporation”
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Property model
- the corporation is property of shareholders
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the purpose is to maximise their wealth
arguments for:
- it is an extension of property rights, fundamental to the democracy
- should concentrate on primary benefit
- consistent with capitalist wealth creation
- corporation is not formed for collateral purposes
- the gov. has the social responsibilities
Entity model
- The corporation I a social institution
- Formed with gov. approval  public purpose
- Is capable of legal and moral obligations
- Obligations to shareholders are complimented by obligations to other
stakeholders
Stapleton “Institutional Investors and Corporate Governance” SM p45
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Separation of ownership and control
Agency costs as a result of diverging interests
- Monitoring costs
- Market forces
- Remuneration
- Information distribution
Institutional involvement
- Reduces costs
- Have greater incentives than individual members
- Have greater resources
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