Company Law — Lecture 14

1. Company Law — Lecture 14 • Duty to act in good faith in the best interests of the company • Duty to act for a proper purpose • Consequences of breach of duty

2. Duty to act in good faith in the best interests of the company • Section 131, Companies Act 1993 — also a common law duty • What is meant by good faith? • director must act honestly • a subjective test

3. Duty to act in best interests of company (cont) • What are the company’s interests? • Possibilities are • shareholders • company as a commercial entity separate from its shareholders • creditors • other companies within a group of companies • employees, customers, suppliers and the community • shareholders • interests of company are generally those of its shareholders • but interests of shareholders may conflict, and directors must balance interests • company as a commercial entity separate from its shareholders • conflicting court decisions

4. Duty to act in best interests of company (cont) • What are the company’s interests? (cont) • creditors • note s 135, Companies Act 1993 (Lecture 13) • common law principle — when company is insolvent or nearly insolvent, its interests are those of its creditors not its shareholders • Kinsela v Russell Kinsela Pty Ltd (in liq) • Gray v Wilson

5. A Ltd 50%+ (or “control”) 50%+ (or “control”) B Ltd C Ltd Duty to act in best interests of company (cont) • What are the company’s interests? (cont) • corporate groups • Can the directors of B cause B to enter a transaction that benefits A or C, but does not directly benefit B ?

6. Duty to act in best interests of company (cont) • What are the company’s interests? (cont) • corporate groups (cont) • wholly owned subsidiaries — s 131(2), Companies Act1993 • a director of a company which is a wholly owned subsidiary may, if permitted by the constitution, act in the interests of the parent company even though the action may not be in the best interests of the subsidiary • subsidiaries which are not wholly owned — s 131(3), Companies Act 1993 • a director may, if permitted by the constitution and with the prior agreement of the shareholders, act in a manner which he or she believes is in the best interests of the parent company

7. Duty to act in best interests of company (cont) • What are the best interest of the company? • employees, customers, suppliers and the community • common law • do not receive priority over interests of shareholders • Parke v Daily News Ltd • s 131, Companies Act 1993 • nothing in s 131 prohibits or restricts a director from making provisions for employees of the company or the subsidiary

8. Duty to act for a proper purpose • Section 133, Companies Act 1993 • Even if directors’ actions are in company’s best interests, they may still be a breach of duty if power is not exercised for a proper purpose • Two-step analysis • question of law: what are the proper purposes for which the power in question may be exercised? • question of fact: for what purpose was the power actually exercised?

9. Duty to act for a proper purpose (cont) • For example, the power to issue shares • normally a power of the board of directors • proper purposes include • to raise capital • for an employee share scheme • as consideration for purchase of an asset • improper purposes may include • to entrench the existing board of directors • to fight off a hostile takeover bidder • to make a majority shareholder a minority shareholder • Powers other than issuing shares • Advance Bank of Australia v FAI Insurances Australia Ltd • Permanent Building Society (in liq) v Wheeler

10. Consequences of breach of duty • See Lecture 16 for discussion