Conflict Avoidance by 5PifeCZ

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									                                 Conflict Avoidance
   RULE: Dirs must not (except with fully informed consent) put themselves n position of conflict
    between personal interest and their duty to act in comp’s interests
OVERVIEW:
    a)   Statutory duty to disclose: s191
    b)   Equitable duty to avoid conflict of interest
    c)   Secret Profits/Misappropriation of comp opportunities
    d)   Misuse of Info/Position: s182,183
    e)   Related Party Transactions: Pt

Tiers of Rules
1. Statutory duty of disclosure
       o If ok  no problem.
       o If fail  no remedy  but equitable duty applies.
2. Equitable duty of loyalty
       o If fail  equitable remedies.
1. Statutory Duty to Disclose Interest
CORPORATIONS ACT 2001 - SECT 191
Material personal interest--director's duty to disclose

Director's duty to notify other directors of material personal interest when conflict arises
(1) A director of a company who has a material personal interest in a matter that relates to the affairs
of the company must give the other directors notice of the interest unless subsection (2) says otherwise.
Notice
   Must give details of nature/extent of interest, AND relation to interest to affairs of comp.
   Must be given at Dir’s meeting as soon as practicable after Dir becomes aware of their interest:
    s191(3)
   Details must be recorded in meeting minutes.
Does not need to give notice if:
 Interests is because: s191(2)(a):
      i. Dir is member of comp and held in common with other members
     ii. Dir is remunerated as Dir of comp
   iii. Interest is related to contract that must be approved by members
    iv.   Dir is Guarantor for loan to comp
     v. Dir has right of subrogation re Guarantee ^
    vi.   Related to contact that insures Dir against liabilities
   vii.   Payment by comp (or related body corp) re indemnity for officer/auditor
  viii. Interest is in contract with/for benefit/on behalf of a related body corp, and Dir is also Dir
          of related body corp
 Comp is proprietary comp and other Dirs are aware of nature/extent of interest and its relation to
  the comp affairs: s191(2)(b)
 Dir has given notice, same notice is given to new Dir, and nature/extent of interest has not
  materially increased: s191(2)(c)
 Dir has given standing notice under s192: 191(2)(d)
Standing Notice
   Standing notice may be given re nature/extent of interest: s192(1)
   Must be given at Dir’s meeting (orally/writing) or to Dirs individually in writing: s192(2)(b)
   Standing notice expires if new Dir appointed and not given notice: s191(5)
“Material Personal Interest”
   Must be both personal and material.
   Includes interests arising from close personal rel, especially family: R v District Council of Victor
    Harbour; Ex parte Costain Australia (1983)
   Materiality: must be “substantial likelihood…the interest would have assumed actual significance
    in deliberations”: Coleman v Myers [1977]
   Eg: Public comp contract with another comp – Dirs of both comps: Transvaal Lands Co v New
    Belgium (Transvaal) Lands and Development Co [1914]
Voting by Dirs with Interest
Proprietary comps
   If Dir has material personal interest in matter relating to affairs of comp:
        o And has disclosed interest under s191(1)
        o Or does not need to disclose it under s191(2)
   THEN: s194 (RR)
        o Dir can vote on matters relating to interest
        o Any transactions related to interest can proceed
        o Dir can retain benefits under trans – even if Dir has interest
        o Comp cannot avoid trans merely bcos interest exists
Public Comps
   Dirs of public comps: s195(1)
       o Who have material personal interest
       o In matter that is being considered at a Dir’s meeting
       o Must NOT be present while it is being considered
   This does NOT apply if:
       o Other Dirs pass resolution that: s195(2)
                Identifies Dir, nature/extent of interest, relation to affairs of comp.
                States that other Dirs are satisfied that interest should not disqualify Dir from
                   voting/being present
       o Interest is exempted under s191(2): s195(1A)
       o ASIC approves (where matter can’t be dealt with cos not enough Dirs, there is
            urgency/compelling reason that it can’t be dealt with at GM): s195(3)
   ALSO, if Dir has confidential info relevant to the matter – should disclose!
       o Can’t just not participate
       o Permanent Building Society (in liq) v Wheeler
Contravention
   Does not affect validity of any act/transaction: s191(4)
   This is not a civil penalty
   BUT – equity still applies and if breach in Equity as well  EQUITABLE REMEDIES.
2. Equitable Duty to Avoid Conflict of Interest
Aberdeen Railway Co v Blaikie Bros (1854) - RULE
 FACT: AR contract to buy from BB. B (Dir of AR) also Dir of BB. AR try to avoid contract.
 HELD:
       o Duty to give co-Dir full benefit of all knowledge/skill which Dir can bear on subject.
       o Duty to get goods at cheapest price v Interest of selling goods at high price.
 LAW:
       o Dir shall [not] be allowed to enter into engagements in which he has, or can have, a
          personal interest conflicting, or which possibly may conflict, with the interest of those
          whom he is bound to protect.
       o NOTE: includes both actual conflicts and possible conflicts.
Imperial Mercantile Credit Association v Coleman (1873) - CONSTITUTION
 Equitable rule can be modified by comp’s Con.
 “must be left to such persons to form their own contract…this Ct has only to sit here and construe
   them”
Hospital Products Ltd v United States Surgical Corp – COUNSEL OF PRUDENCE
  Deane and Mason JJ:
            o “more counsel of prudence than rule of equity” – Dir must ensure not to place
                themselves in a position in which duty and interest, or 2 diff fid duties conflict.
            o Where conflict arises – Dir must not take adv/exploit by failing to disclose.
Furs Ltd v Tomkies (1936) – STRICT RULE
 FACT: T (MD of F and Manager of part of F bus). Comp 2 want to buy part – T instructed by
   BOD to neg. Comp 2 only buy if can get T’s services. T tells Chairman. C says if so, can’t keep T
   on their staff and that T should make best deal T can in Comp 2. T neg salary and bonus to himself,
   at expense of lower sale price to Comp 2. BOD/Sh not aware of T’s bonus.
 TRIAL: T put into position of conflict by F (not his fault)  can keep benefit since he treated F
   fairly.
 HC: overturned – T liable.
            o Irrelevant that unless he work for Comp 2, F wouldn’t have gotten a sale at all.
 LAW:
            o Duty of loyalty is STRICT – no need to show unfairness to comp (no basis for liability
                besides that interest has been opposed to duty).
            o Irrelevant that profit is one that comp would not have gotten itself, or that comp suffer
                no loss.
            o Enough that  undisclosed profit that Dir gets from executing his duty  belongs (in
                equity) to comp.
            o Complete disclosure/confirmation by Sh (not just Chairman) is only remedy.
 CF Chan v Zacharia (1984): balance against commercial practice:
            o Strict principle is not unqualified
            o Will not apply where Fid duly authorised (by instrument, appointment, consent
Chan v Zacharia (1984) – ACTUAL PURSUIT OF SELF INTEREST
 Equity is not so much concerned with mere existence of conflict…as with the actual/active pursuit
   of self interest
            o Eg. actually entering trans/engagement, or actually receiving personal benefit/gain
            o Includes actual failure to accnt/disclose the benefit – later unsolicited payment from 3rd
                party.
Phipps v Boardman [1967] – REAL SENSIBLE POSSIBILITY OF CONFLICT
 “possibly may conflict” (from Aberdeen) means = reasonable ma looking at relevant facts/circs of
   the particular case would think that there was a real sensible possibility of conflict.
Chan v Zacharia (1984); The Bell Group (2008) – SIGNIFICANT POSSIBILITY OF CONFLICT
 “a conflict…or a significant possibility of conflict”.
Whitehouse v Carlton Hotel P/L (1987) – MIXED PURPOSES
 If there are mixed purposes in action – Dir may be able to act in self interest IF actuating motive is
   not self interest, but BF concern for comp
 Actuating motive – purpose was causative (but for its presence), power would not have been
   exercised.
Imperial Mercantile Credit Association v Coleman (1873) - DISCLOSURE
 FACT: C Dir of IMCA. C also stockbroker contracted with P&C to sell debenture subscriptions –
   commission (5% cash, 5% shares). C (as Dir) persuade IMCA to subscribe – didn’t tell IMCA his
   deal with P&C, only that he was “interested” and offered to leave.
 APPEAL: held liable – accn of profits
       o To just say “interested” is insufficient to be full disclosure.
 LAW:
       o Interest: notice must state clearly WHAT the interest is (not just “interested”)
       o Intention: must state WHAT their intention/opinion is (not just that they have an
            opinion/intention)
       o Cannot leave it for other Dirs to make further inquiry as to the “interest”.
       o Need to disclose to Sh not just Dirs (in same fid position)
Remedies
   Ratification: Sh can ratify conduct: s239
       o But a person can still bring proceedings with leave even if ratified: s239(1)
   Transactions  voidable
       o Rescission: eg. Aberdeen Railway Co v Blaikie Bros (1854)
       o Injunction
   Compensation:
       o Damages
       o Accn of profits:
                 Imperial Mercantile Credit Association v Coleman (1873): look above.
                        FACT: C part of broker firm. C claim only accn of profits of his share – not
                           entire firm’s profit.
                        HELD: accn of entire firm’s profit – source of profit was obtained by C
                           (whether he was gonna keep it all or share with firm is immaterial).
                 Gray v New Augarita Porcupine Mines Ltd [1952]
                        Even if contract not rescinded (bcos company affirms it or incapable of
                           rescission)  Dir is still accntable for any profit from the deal.
   Relief from civil penalty (stat duty): s1317S
       o If person contravene
       o But act honestly and, in all circs, person ought fairly to be excused
       o  Ct may relieve person wholly/partly from liability
   Relief from civil proceedings re negligence, breach of trust, breach of duty (equitable duty): s1318
       o Same requirements as above.
                                      Nominee Dirs
  Appointed by external body – act by some understanding/arrangement/status that they have
   obligation to Appointer.
           o Eg. Appointers may be Sh, class of Sh, majority lender to comp, group of comp
               employees, participant in joint venture
           o Form: may be formally appointed in Con, or just understanding/expectation.
 THUS: Conflict between obligation to act in bests interests of appointer or comp
Levin v Clark [1962[
 FACT: Con provide for appt of C and R (by Mgee) as gov Dirs – but only if comp defaults in
   Mgee. Default – C/R pass resolutions.
 HELD: resolutions valid.
           o Permissible to act primarily in interests of Mgee – interests of comp may often include
               interests of 3rd parties (interests are not homogenous!)
           o Artificial to ignore Mgee’s interests in these circs.
Re Broadcasting Station 2GB Pty Ltd [1964-1965]
 Only breach duty IF it can be inferred that NDs “would so act even if they were of the view that
   their acts were not in the best interests of the company” (eg. where interests are divergent).
 Thus – ok, if NDs have BF belief that Appointer’s interests same as comp’s interest as whole
 Rationale: cannot ignore realities of comp organization and make positions of NDs impossible.
                       Secret Profits/Opportunities
   There must be a sufficient connection between the PROFIT/OPP and the CONFLICT.
Misappropriation of Comp’s Opps
Cook v Deeks [1916]
 FACT: Comp 1 (D bros, H, C – Sh/Dirs). C - min Sh/Dir. Comp construct railway. D bros and H
   neg contract for extending railway under new Comp 2 (not including C) without C’s knowledge. D
   bros and H then voted in Sh meeting to approve their conduct as Dirs and resolve that comp had no
   interest in new contract.
 HELD: Dirs breach fid duty  accn of profits.
           o Opp belonged to Comp 1
           o Deliberately excluded (using their position/influence) the company whose interest they
                had duty to protect.
 LAW:
           o Clear example of a STRONG connection between profit/opp and conflict
           o Dirs cannot claim benefit - cannot sacrifice comp’s interests by diverting to themselves
                business, which should belong to comp.
           o Dirs (holding maj shares) cannot ratify/approve their breach - cannot make present to
                themselves (oppress minority).
Peso Silver Mines Ltd (NPL) v Cropper (1966)
 FACT: P offered mining claims by D from Dr Aho’s referral. P reject. Dr Aho join with C (Dir of
   P) to form corp to accept D’s offer themselves.
 HELD (Cartwright): NO accn of profits.
           o When P reject (with C on BOD) – it was in good faith and sound business judgment.
           o C did not acquire opp bcos of position as Dir
                     Offer to P did not contain any confidential info
                     Dir did not have access to any confidential info by his position
                     Dr Aho approached C later not as Dir, but individual member of public.
Canadian Aero Service v O’Malley (1973)
 FACT: Canaero (topo mapping) – O (Pres and CEO) + Z (Exec VP). C learn re good possible gov
   project. O/Z do detailed investigation + pursued on behalf of C until know certain that project was
   certain. C/Z resign and set up TS. At bid, C did not submit proposal, TS submitted great proposal.
   T got contract.
 ISSUES:
           o O/Z’s rel with C – if employees (free to set up own comp, except by use of trace
                secrets), or Fids?
 HELD: accn of profits
           o O/Z were clearly top management – not mere employees  fid duty applies not just to
                Dirs but officers in managerial capacity.
           o Fid duty:
                     Precludes Fid from taking opp that the comp is actively pursuing
                     Precludes Fid from taking opp, even AFTER resignation – if resignation
                        prompted/influenced by wish to get opp himself
                     Precludes Fid from taking opp, where got opp by position of comp (rather than
                        fresh initiative)
           o Fid duty extends beyond resignation.
           o Depends on facts of each case:
                     Position/office held
                     Nature of corp opportunity
                     Ripeness and specificity of opp
                     Amount of knowledge possessed
                     Circ in which it was obtained
                     Whether it was special/private
                     Circ under which resignation took place
                 Time between resignation and breach
           o Cf Peso:
                 Canaero had not rejected offer – was actually pursuing this particular deal.
                 Knew about Canaero’s continuing interest
                 Strong connection between resignation and formation of TS with intent to get
                    contract.
Profits where there is conflict
Phipps v Boardman [1967]
 FACT: B (solicitor for Trust) and TP (resid Ben) bought shares in comp to takeover comp in which
   Trust had investment. After, success and profit for Trust, TP and B. TP and B had written to other
   Bens advising of plan and got consent, except senile Ben. 1 Ben sue account of profits against TP
   and B and say shares they bought on Trust for them.
 HELD: accn of profits  1 Ben win – TP and B hold shares on CT
          o Got info/opp about good takeover bcos of Fid position
          o Reason: conflict of interest with personal profit (breach of Fid), info was confidential,
              failed to inform/consent from senile Trustee.
 THUS:
          o Intention of Fid is irrelevant – can breach while acting in good faith and no intention to
              defraud
          o Ben does not need to suffer loss to claim breach – can even claim if profit!
          o Information must be special information – eg. confidential info


                          Misuse of position or info
Position: s182 – civil penalty!
1. Dir/sec/officer/employee of comp must not improperly use position to:
       a) Gain adv for self or someone else; or
       b) Cause detriment to comp
2. Person involved in contravention of this  also liable
Information: s183 – civil penalty!
1. Person who obtains info, because they are/were Dir/officer/employee of comp must not improperly
   use info to:
       a) Gain adv for self or someone else; or
       b) Cause detriment to comp
2. Person involved in contravention of this  also liable
               Related Party Transactions – Part 2E
Prohibition
   Public comp (or controlling entity) cannot give financial benefit to RP
   Unless: s208(1)
        o Disclosed/approved by Sh in GM and then given within 15 mths: s208(1)(a)
        o Benefits covered by exceptions s210-216: s208(1)(b)
   If FB required by contract
        o AND contract is disclosed/approved by Sh in GM
        o AND contract made within 15mths of approval (or contract conditional on approval)
        o THEN: member approval is taken to be given + benefit need not be in 15mths
Entity
   Entity: corp, partnership, unincorp body, individual or trust: s9
   Controlling entity – controls if has capacity to determine outcome of decisions about entity’s
    financial/operating policies: s50AA(1)
        o Capacity is: look at practical influence, any practice/pattern of behaviour affecting entity’s
            financial/operating policies: s50AA(2)
        o Does not include where comp and another comp jointly have capacity to control
        o Does not include where comp (under legal obligation) to exercise for benefit of someone
            other than Sh: s50AA(4)
Giving a financial benefit
   In determining whether FB given:
        o Broad interpretation, even if crim/civil penalties involved: s229(1)(a)
        o Economic/commercial substance of conduct prevail over its legal form: s229(1)(b)
        o Disregard any consideration given, even if adequate: s229(1)(c)
   There is no threshold of FB – ALL FB require Sh approval.
   Includes:
        o Indirectly – eg. through 1+ interposed entities: s229(2)(a)
        o Making informal agt, oral agt, non-binding agt: s229(2)(b)
        o Benefit that is not giving money (if it gives some financial adv): s229(2)(c)
   Examples: s229(3)
        o Giving finance/prop to RP
        o Sale/purchase/lease of an asset to/from RP
        o Receipt/provision of services
        o Issue of securities or grant of option to RP
What is a related party?
Includes:
 Controlling entities: entity that controls the public company: s228(1)
 Dirs of the public comp: s228(2)(a)
 Dirs of a controlling entity: s228(2)(b)
 Persons making an unincop controlling entity: s228(2)(c)
 Spouses of Dirs ^: s228(2)(d)
 Parents or children of Dirs/Dir’s spouses: s288(3)
 Any entity controlled by the above: s228(4)
In addition – RP at particular time if
 RP at any time within past 6 mths: s228(5)
 Entity believes or reasonable grounds to believe  likely to become RP at any time in future:
    s228(6)
 Entity acts in concert with RP on understanding that if entity get financial benefit from public
    comp – will give to RP: s228(7)
Does not include:
 Sub or controlled comp of public comp
 Sub’s Dirs or Dirs of fellow subsidiary of public comp
   Siblings or other relatives of Dirs/Dir’s spouses
Breach
   Breach of s208(1)
       o Does not affect validity of contract/trans: s209(1)(a)
       o Does not make the public comp or entity guilty of offence: s209(1)(b)
       o But Ct may order inj to stop giving of FB
   BUT person involved in breach  contravenes s209: s209(2)
       o This is a civil penalty  s1317E (declaration, pecuniary penalty, disqualification)
   BUT person dishonestly involved in breach  offence: s209(3)
   Involved means aided/abetted/counseled/procured, induced by threat/promise, knowingly
    concerned, conspired: s79
Exceptions
   Arms length: terms of FB no more favourable to RP than would be reasonable in circ if parties
    were dealing at arm’s length: s210
   Reasonable remuneration: paid to officer/employee of public comp/controlling entity: s211
       o Must be reasonable given the circ eg. responsibilities of their office/employment: s211(1)
       o Payment/reimbursement of expenses: s211(2)
       o Remuneration incl super contributions and termination payments: s211(3)
   Benefit to closely held sub, or from closely held sub to another sub: s214
       o Closely held sub: wholly owned sub if non-voting shares disregarded: s214(2)
   Members: FB given to own members in their member capacity, where it doesn’t discriminate
    unfairly against other members: s215
Sh approval
   Must lodge with ASIC – 14 days before notice re GM is given to members: s218
        o Proposed notice of meeting
        o Proposed Explanatory statement
        o Any other doc proposed to accompany notice
        o Any other doc – reasonably expected to be material to member in deciding how to vote
   Must prepare Explanatory Statement:
        o RP and nature of benefits: s219(a-b)
        o Each Dir’s rec and reasons (if Dir doesn’t want to rec or is unavailable – must state reason
           why): s219(1)(c-d)
        o All such info known to comp/Dirs that is reasonably required by members to decide if in
           comp’s best interests to pass resolution: s219(1)(e)
        o Incl. costs (from economic and commercial pov), tax, benefits foregone: s219(2)
   ASIC comment – within 14 days of lodgment:
        o Written comments on doc – OTHER than comments re if res in comp’s best interests: s220
   Notice of meeting: s221
        o Must include ASIC’s comments
        o Must be same in all material aspects as proposed notice given to ASIC
        o Must be accompanied by Explanatory Statement and other docs lodged with ASIC (no
           other docs!)
   Voting: s224
        o Vote cannot be cast by (or on behalf of) a benefiting RP or associate of RP: s224(1)
        o If contravene ^, may be still valid if still passed if those votes disregarded: s225(1)
        o If contravene – does not affect validity of res: s224(8)
   In 14 days of res passing  must lodge with ASIC notice re text of resolution: s226

								
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