Conflict Avoidance

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

Statutory duty of disclosure
If ok  no problem.
If fail  no remedy  but equitable duty applies.
Equitable duty of loyalty
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 interestin a matter that relates to the affairs of the companymust 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):
Dir is member of comp and held in common with other members
Dir is remunerated as Dir of comp
Interest is related to contract that must be approved by members
Dir is Guarantor for loan to comp
Dir has right of subrogation re Guarantee ^
Related to contact that insures Dir against liabilities
Payment by comp (or related body corp) re indemnity for officer/auditor
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 VictorHarbour; 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:
And has disclosed interest under s191(1)
Or does not need to disclose it under s191(2)
THEN: s194 (RR)
Dir can vote on matters relating to interest
Any transactions related to interest can proceed
Dir can retain benefits under trans – even if Dir has interest
Comp cannot avoid trans merely bcos interest exists

Public Comps

Dirs of public comps: s195(1)
Who have material personal interest
In matter that is being considered at a Dir’s meeting
Must NOT be present while it is being considered
This does NOT apply if:
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
Interest is exempted under s191(2): s195(1A)
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!
Can’t just not participate
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:
Duty to give co-Dir full benefit of all knowledge/skill which Dir can bear on subject.
Duty to get goods at cheapest price v Interest of selling goods at high price.
LAW:
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.
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:
“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.
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.
Irrelevant that unless he work for Comp 2, F wouldn’t have gotten a sale at all.
LAW:
Duty of loyalty is STRICT – no need to show unfairness to comp (no basis for liability besides that interest has been opposed to duty).
Irrelevant that profit is one that comp would not have gotten itself, or that comp suffer no loss.
Enough that  undisclosed profit that Dir gets from executing his duty  belongs (in equity) to comp.
Complete disclosure/confirmation by Sh (not just Chairman) is only remedy.
CF Chan v Zacharia (1984): balance against commercial practice:
Strict principle is not unqualified
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
Eg. actually entering trans/engagement, or actually receiving personal benefit/gain
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
To just say “interested” is insufficient to be full disclosure.
LAW:
Interest: notice must state clearly WHAT the interest is (not just “interested”)
Intention: must state WHAT their intention/opinion is (not just that they have an opinion/intention)
Cannot leave it for other Dirs to make further inquiry as to the “interest”.
Need to disclose to Sh not just Dirs (in same fid position)

Remedies

Ratification: Sh can ratify conduct: s239
But a person can still bring proceedings with leave even if ratified: s239(1)
Transactions  voidable
Rescission: eg. Aberdeen Railway Co v Blaikie Bros (1854)
Injunction
Compensation:
Damages
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
If person contravene
But act honestly and, in all circs, person ought fairly to be excused
 Ct may relieve person wholly/partly from liability
Relief from civil proceedings re negligence, breach of trust, breach of duty (equitable duty): s1318
Same requirements as above.

Nominee Dirs

Appointed by external body – act by some understanding/arrangement/status that they have obligation to Appointer.
Eg. Appointers may be Sh, class of Sh, majority lender to comp, group of comp employees, participant in joint venture
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.
Permissible to act primarily in interests of Mgee – interests of comp may often include interests of 3rd parties (interests are not homogenous!)
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.
Opp belonged to Comp 1
Deliberately excluded (using their position/influence) the company whose interest they had duty to protect.
LAW:
Clear example of a STRONG connection between profit/opp and conflict
Dirs cannot claim benefit - cannot sacrifice comp’s interests by diverting to themselves business, which should belong to comp.
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.
When P reject (with C on BOD) – it was in good faith and sound business judgment.
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/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/Z were clearly top management – not mere employees fid duty applies not just to Dirs but officers in managerial capacity.
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)
Fid duty extends beyond resignation.
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
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
Got info/opp about good takeover bcos of Fid position
Reason: conflict of interest with personal profit (breach of Fid), info was confidential, failed to inform/consent from senile Trustee.
THUS:
Intention of Fid is irrelevant – can breach while acting in good faith and no intention to defraud
Ben does not need to suffer loss to claim breach – can even claim if profit!
Information must be special information – eg. confidential info

Misuse of position or info

Position: s182 – civil penalty!

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

Person involved in contravention of this  also liable

Information: s183 – civil penalty!

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

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)
Disclosed/approved by Sh in GM and then given within 15 mths: s208(1)(a)
Benefits covered by exceptions s210-216: s208(1)(b)
If FB required by contract
AND contract is disclosed/approved by Sh in GM
AND contract made within 15mths of approval (or contract conditional on approval)
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)
Capacity is: look at practical influence, any practice/pattern of behaviour affecting entity’s financial/operating policies: s50AA(2)
Does not include where comp and another comp jointly have capacity to control
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:
Broad interpretation, even if crim/civil penalties involved: s229(1)(a)
Economic/commercial substance of conduct prevail over its legal form: s229(1)(b)
Disregard any consideration given, even if adequate: s229(1)(c)
There is no threshold of FB – ALL FB require Sh approval.
Includes:
Indirectly – eg. through 1+ interposed entities: s229(2)(a)
Making informal agt, oral agt, non-binding agt: s229(2)(b)
Benefit that is not giving money (if it gives some financial adv): s229(2)(c)
Examples: s229(3)
Giving finance/prop to RP
Sale/purchase/lease of an asset to/from RP
Receipt/provision of services
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)
Does not affect validity of contract/trans: s209(1)(a)
Does not make the public comp or entity guilty of offence: s209(1)(b)
But Ct may order inj to stop giving of FB
BUT person involved in breach  contravenes s209: s209(2)
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
Must be reasonable given the circ eg. responsibilities of their office/employment: s211(1)
Payment/reimbursement of expenses: s211(2)
Remuneration incl super contributions and termination payments: s211(3)
Benefit to closely held sub, or from closely held sub to another sub: s214
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