Scenario 1: Acquisition Attempt by Urbanlodge Limited of Uninest Limited

In the given scenario there are two transacting companies namely Uninest Limited (‘Uninest’) and Urbanlodge Limited (‘Urbanlodge’). Urbanlodge Limited (‘Urbanlodge’) wished to acquire Uninest Limited (‘Uninest’) and made an offer to pay $12 per share when the present share value of shares is valued at $10 per share. A consultant, Christine Neales, suggested a counter measure whereby the board of directors could sanction a loan of behalf of a director who would then be able to purchase shares of Uninest Limited (‘Uninest’) in a large quantity. This would increase the prices of shares and thus Urbanlodge Limited (‘Urbanlodge’) would not be able to purchase the shares at this increased price. Thus a loan was sanctioned for a director, Gillian, who purchased the shares and resultantly inflated the prices of shares. It must be determined here if the directors of Uninest Limited (‘Uninest’) had in fact breached their statutory and common law duties as directors and if the consultant would face any liability for the same.

Corporations that are incorporated or are conducting business within the jurisdiction of the Australian commonwealth are governed and regulated vide through provisions of the Corporations Act, 2001 (Hanrahan, Ramsay & Stapledon, 2013). The Australian commonwealth also embodies common law principles which are developed through judicial precedents. Common law is also known as general law (Sealy & Worthington, 2013). As per general law the directors of an organization have a fiduciary duty to act in good faith and in the best interests of the company (McQueen, 2016). This ensures that the interests of the company are considered the highest priority and all conflicts of interests, especially financial self-interests of the directors, is avoided which acting on behalf of the company (Hannigan, 2015). These duties are further consolidated by embodying them as statutory duties in the provisions of the Corporations Act, 2001.

In the landmark case ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963 it was held by the court that any decision taken by the administration of a company that leads to a conflict of interest between them and the company would be a breach of these duties that are embodied in common law and statutory law (McLaughlin, 2018). This thus means that if the directors of a company act in ways that cause detriment to the company while satiating any personal gain for themselves the same would amount to a conflict of interest and would resultantly be a breach of the duties and obligations that they are entrusted with as established by the court in Chan v Zacharia [1984] HCA 36 (Ginzberg, 2017). It may be thus inferred that directors of a company, when acting on behalf of the company, must act for the betterment of the company. This in known as acting for a “proper purpose” which is also an obligation that directors of a company are entrusted with. The determination of whether the Board of Directors has acted for a proper purpose is judicially undertaken through the two-step test as laid down in the landmark judgment in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (Ferran & Ho, 2014). This two-step lays down a conclusive determination of whether statutory and/or common duties have been breached by a director or the board of directors as a whole. This case also conclusively established that if directors of a company use their position to alter the share prices of the company the same would be unlawful (Bottomley, 2016). An attempt to remain as directors through an improper use of the powers vested in them would also amount to breach of their duties.

Scenario 2: Bidding Competition between Primo Construction Limited and Iconstruct Limited for Landstock Limited

In the Corporations Act, 2001 the duties of a director prescribed by common law are codified at Sections 180-184. Section 181 of the Corporations Act, 2001 defines a director’s duty to act in good faith and in the best interests of the company (Baxt, Ali & Thomas, 2015). This universally defines the duty of a director to act considering the betterment of a company. Section 184 of the Corporations Act, 2001 imposes a criminal liability for directors who fail to observe the duties that they are entrusted with statutorily (Arens et al., 2013). This section also states that when directors have used their position to gain an unfair advantage for themselves or where they have caused detriment to the company by acting recklessly the same would amount to criminal liabilities. This is provided for in Section 184 (2) (a) and (b) (Finch & Milman, 2017).

As observed by the HIH report published in 2003 following the HIH insurance fraud, the Corporations Act, 2001 does not provide for any liability to consultants and independent contractors who provide advice to the Board of Directors of a Company (Gullifer & Payne, 2015).

As inferred from the facts and circumstances provided in the scenario a company was about to be acquired and the Board of Directors of the company wished to retain their designations. Thus the share prices of the entity were strategically inflated by the Board of Directors in order to ensure the takeover fails. In order to decide of the Board of Directors had in fact breach their duties it must be determined if the Board was acting for a proper purpose. In order to determine the same the two-step test laid down in the judgment in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (Varzaly, 2015). The first step to the test is to determine the purpose of a particular power which was conferred upon the directors. In this case it is the director’s power to pass resolutions, which is prescribed under Section 248G of the Corporations Act, 2001 (Braithwaite, 2013). This power is conferred upon the Board to ensure that the opinions of all members of the board are taken when acting on behalf of the company (the act must be in the best interests of the company as prescribed under Section 181). The second step of the test considers the purpose that the power was ultimately used for. The directors of Uninest Limited (‘Uninest’) used this power to pass resolutions that would benefit their self-interests while causing detriment to the company. Thus the power conferred upon them was used for an improper purpose.

Thus since the directors of the company had acted for an improper purpose that would serve their own self-interests the same would be construed as a conflict of interest. Thus following the provisions of Section 181 of the Corporations Act, 2001 this would be considered a breach of their statutory duties (Du Plessis, 2017). A conflict of interest would also amount to a breach of fiduciary duties prescribed under common law as laid down in the case Chan v Zacharia [1984] HCA 36. Thus such a breach would warrant criminal liabilities under the provisions of Section 184 of the Corporations Act (Backhouse & Wickham, 2017). As determined by the HIH report in 2003 a consultant (in this case Christine Neales) would not be held liable for providing advice to the Board as the Corporations Act, 2001 and common law do not provide for liabilities for the same.

Conclusion

The Board of Directors of Uninest Limited (‘Uninest’) was in breach of their fiduciary duties under common law and is additionally in breach of the statutory duties under Section 181 of the Corporations Act, 2001. Christine Neales however would not be held liable for advising the Board of Directors of Uninest Limited (‘Uninest’).

In the given set of circumstances there are two companies involved in the dispute, namely, Primo Construction Limited (“Primo”) and Iconstruct Limited (“Iconstruct”). These companies are competing for a tender through bidding for another company called Landstock Limited (“Land stock”). The tender is ultimately given to Iconstruct Limited (“Iconstruct”).. However a director of Iconstruct Limited (“Iconstruct”) namely, Shane is also a director of Primo Construction Limited (“Primo”) and has been able to make a lower bid because he was aware of the bid made by Primo Construction Limited (“Primo”). The issue to be determined in this scenario is if Shane was in breach of his director’s duties in using such information anf the plausible remedies for the same.

A director of a company is not barred from being a director of another competing company under the provisions of the Corporations Act, 2001 but there is a prohibition against using information obtained by him by virtue of his position as a director to cause detriment to the company. This was laid down in the judgment in Streeter v Western Areas Exploration Pty Ltd [2011] 82 ACSR 1 (Friedlander, 2014). Avoiding all forms of diversion of business opportunities is considered a breach of fiduciary duties prescribed under common law as determined by the court in the landmark judgment Green v Bestobell Industries Pty Ltd [1982] 1 ACLC 1 (Hargovan, 2017). This refers to a misdirection of commercial opportunities to other companies or depriving a company of a business opportunity which would normally come to them. This would thus take away business opportunities which the company would obtain in the usual course of business and this causes a detriment to the company. A breach of fiduciary duties in such a form would amount to resulting damages for such a breach.

Statutorily, the duties of a director or obligations placed upon him by the organization by virtue of his position is envisaged in Section 180-184 of the Corporations Act, 2001. Section 183 of the Corporations Act, 2001 states that a director is prohibited from using information he has obtained by virtue of his position in the company to cause detriment to the company or gain an unfair advantage for himself (Kraakman & Hansmann, 2017). Additionally Section 184 (3) of the Corporations Act, 2001 prescribes criminal liabilities for a breach of statutory duties defined under Section 180-183 of the Corporations Act, 2001. This thus means that if a director of an entity is in breach of the statutory duties provided for in the Corporations Act, 2001 it would amount to a criminal charge brought against him as opposed to damages (as a civil penalty) as prescribed under common law (Laster & Zeberkiewicz, 2014).

In the present dispute, the facts and circumstances provided clearly state that Shane was a director of Primo Construction Limited (“Primo”). It can also be inferred that while acting in the capacity of a director for Primo Construction Limited (“Primo”) Shane incorporated his own company known as Iconstruct Limited (“Iconstruct”) which became a competitor of Primo Construction Limited (“Primo”) as they both were engaged in the business of construction. In obtaining tenders through bids, the company offering the lowest bid would ideally be awarded the contract. Iconstruct Limited (“Iconstruct”) was awarded the contract as the lowest bidder. However it was only able to make such a low bid as it was aware of the bid made by Primo Construction Limited (“Primo”). Shane’s position as a director in both competing entities would not lead to a breach of his duties as clarified by the court in Streeter v Western Areas Exploration Pty Ltd [2011] 82 ACSR 1 (Hanrahan, Ramsay & Stapledon, 2013). However the case also clarified that such a director would be prohibited from divulging information obtained by him virtue of his position as director in any of the entities. In this case Shane had divulged information he had obtained by virtue of his position as director in Primo Construction Limited (“Primo”) and the same would thus be a valid conflict of interest and would be prohibited by law. Additionally in light of the judgment delivered by the court in Green v Bestobell Industries Pty Ltd [1982] 1 ACLC 1 a diversion of business opportunities would also amount to a conflict of interest and as determined by the court the same would be a breach of fiduciary duties embodied in common law (Baxt, Ali & Thomas, 2015). This conflict of interest was created by divulging information obtained as a director of Primo Construction Limited (“Primo”) and this led to diversion of business opportunities which can be construed as causing detriment to the company. This is because unless the information had been divulged by Shane Primo Construction Limited (“Primo”) would successfully obtain the tender. Thus in such a case Shane would also be in breach of his statutory duties provided for under Section 183 of the Corporations Act, 2001 which governs use of information obtained as a director (Sealy & Worthington, 2013). Thus Shane was in breach of his common law duties and would be liable to pay damages for the same. Furthermore, Shane was also in breach of his statutory duties under the act and thus would be liable to face criminal liabilities as prescribed under Section 184 of the act.

Conclusion

To conclude, due to the information divulged by Shane, he would be in breach of his fiduciary duties as a director of Primo Construction Limited (“Primo”) and would have to pay damages for the same. He would also face criminal liabilities for the breach of his statutory duties under Section 183 of the Corporations Act, 2001 (Cth).

Frank, Diane, Ron and Kelly are directors of a company that wish to enter into a contract with a robotics company in order to employ their robots in their agricultural business. An expert report is prepared stating that the same would not be prudent for the company to enter into as the software used for the products is not developed enough to adequately discharge the operations required by the company. Ron and Kelly are against entering into the contract due to the expert report. However they are convinced by Frank and Diane to sanction the same and thus the issue here is to determine if the directors have breached their common law and fiduciary duties.

  As determined by the court in the case ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963 the directors of a company have a fiduciary duty under common law to act in the best interests of the company when acting on behalf of the company (Hanrahan, Ramsay & Stapledon, 2013). This means that the Board of Directors cannot act on behalf of the company in a way that causes detriment to the company. This is also provided for in Section 181 of the Corporations Act, 2001 which defines a director’s statutory duty to act in good faith and in the best interests of the company (Baxt, Ali & Thomas, 2015).

Frank and Diane were provided with a copy of the expert report which clearly stated that entering into such a contract would not be in the best interests of the company. However, neither of them read the same. Additionally, Ron and Kelly read the report and were aware that the contract would not be beneficial for the interests of the company but sanctioned the contract regardless of the same. In such an instance all the directors of the company were aware that the step proposed for the company was not aligned with the best interests of the company (Hanrahan, Ramsay & Stapledon, 2013). The Board of Directors ultimately pursued the contract and entered into the same. Thus they were acting in self-interest and not in the best interests of the organization (Sealy & Worthington, 2013). Thus the Board was in breach of its fiduciary duties as laid down in the judgment in ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963 as well as their statutory duties as prescribed under Section 181 of the Corporations Act, 2001 (Cth) (Baxt, Ali & Thomas, 2015).

Conclusion

To conclude, Frank, Diane, Ron and Kelly were in breach of their fiduciary duties in common law as directors of the company as well as their statutory duties.

Frank, Diane, Ron and Kelly are directors of a company that wish to enter into a contract with a robotics company in order to employ their robots in their agricultural business. An expert report was prepared advising that it would be profitable for the company if the same entered into. However after execution of the contract it is seen that the software is inadequate for the business and this thus leads to a loss for the company. The issue here is to determine the statutory defenses that the directors can avail.

The business judgment defense is envisaged in Section 180 (2) of the Corporations Act, 2001 (Cth) (Sealy & Worthington, 2013). This states that when the directors of an entity have failed to observe their statutory duties if the directors can establish that the act was undertaken in good faith [180 (2) (a)], was not done due to conflict of interest [180 (2) (b)], was undertaken after due diligence was observed [180 (2) (c)] and/ or was in the best interests of the company then the same would act as a defense for the directors (Hanrahan, Ramsay & Stapledon, 2013). This means that they would be absolved of all liabilities for the same.

In this case an expert report was undertaken stating that entering into the contract would be profitable for the company. Thus, due diligence was observed. The directors undertook this to increase the company’s profits and thus this was an act in good faith and in the best interests of the company (Hanrahan, Ramsay & Stapledon, 2013). Furthermore, this was not undertaken to serve any conflict of interest of the Board of Directors. Thus all the requisites of Section 180 (2) of the Corporations Act, 2001 (Cth) have been met in the present scenario (Baxt, Ali & Thomas, 2015). Thus the directors can avail the business judgment defense in this case.

Conclusion

To conclude, under the given set of facts and circumstances, Frank, Diane, Ron and Kelly would be able to avail the business judgment defense and would thus be absolved of all responsibilities for the same.

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