DIRECTORS
DIRECTORS Introduction
Board
Company
General meeting
Board (all directors): S 198A(1) (replaceable): “business of the company is to be managed by or under the direction of the directors” May delegate General meeting (GM) (body of shareholders) Appoints and may refuse to re-elect directors Exercises statutory and constitutional powers
Division of powers o Modern view - board is not simply an agent of the general meeting History Automatic Self-Cleansing Filter Syndicate Co Ltd (par 12.85) o GM has powers conferred by CA and constitution o Doctrine of the supremacy of the constitution Management powers vest in board unless constitution determines otherwise (par 12.75) GM may be allowed to intervene in exceptional circumstances o Which organ is the most powerful?
Directors
All companies have directors who are collectively called “the board of directors” Minimum number: o Proprietary companies: One director ( s201A (1) ) o Public companies: Three (s 201A (2) ) Initial directors are those whose names appear on with their consent on the application for registration
Who is a director? Section 9 definition: a person who is appointed to the position of director or alternate director OR if not validly appointed and: o He or she acts in the position of the director – a driving force behind the company (de facto director) or o the other directors are accustomed to act in accordance with the person’s instructions or wishes (shadow director) Not merely because person is properly giving professional advice or there is a business relationship with directors or company
o
De facto and shadow directors are included for purposes of liability, not powers
De facto director Persons acting as directors although they are disqualified (lacked a required share qualification) or certain appointment formalities were not complied with etc o CAC v Drysdale (1978) 141 CLR 236: Where director’s appointment terminated but he carried on acting as director o Deputy Commissioner of Taxation v Austin (1998) ACLC 16 1,555: Director resigned but failed to file notice with ASIC and continued to carry out some functions Whether person acts as a de facto director is a question of fact Shadow director Puppet master: Persons whose instructions are normally followed by the board of directors
Must control board rather than single director – Re a Company [1989] BCLC 13 o Perhaps sufficient to control the majority vote at the board? Can include a company exercising such power – e.g. a holding company o Standard Chartered Bank of Australia v Antico (1995) 13 ACLC 1381 Excludes professional advisors/consultants
Types of directors Managing director (CEO) in charge of daily business of the company responsible for senior executives Normally has wide authority to conclude business contracts on behalf of co Chair of directors Appointed by other directors to chair meetings Important function o Colorado Constructions Pty Ltd v Platus (1966): Two directors left a meeting after a brawl and the remaining directors purported to pass a resolution. This was challenged and the Court said this was invalid as no Chair had been appointed. o In charge of governance of professional operation of board – higher duty for functioning of the board – ASIC v Rich Executive directors: Take part in daily management of the company Senior managers with substantial control over the company’s activities Non-executive directors: Participate in board meetings to oversee and inform the activities of the management Alternate director: Stand in at board meeting for director when unavailable Not merely an agent of the director but has no powers when director is present Nominee director: Appointed by specific group or body (holding co, employees, creditor) to oversee board
For duties see par 13.2.55 (may act in nominator’s interest unless that conflicts with interests of co)
Functions and powers of the Board
Board sets the direction of the company and holds management accountable o Powers are determined by replaceable rules (RR), company’s constitution (if it has one) and Corporations Act o Responsibility of board See list on page 314-314 See figure 12.1 for powers
Management powers
S 198A (RR) states that the business of a company is to be managed by directors o Broad power which can include changing the direction of a company or selling the only business carried on by it Strong: Directors DO NOT have to get shareholders’ approval to sell However under ASZ Listing Rules shareholder approval is required if a listed company proposes to make significant change to the nature/scale of its activities
Shareholders cannot override management Shareholders cannot involve themselves in the management of the company Automatic Self- Cleansing Filter Syndicate Co v Cunninghame (1906) Facts:
Held:
Directors were ordered by general meeting of members to sell the company’s property Directors refused, relying on constitution Constitution gave management powers to the board of directors including power to sell property. Members could not interfere as they were contractually bound by the constitution
Separation of ownership and control in co Ownership vests in shareholders Control vests in board
Board procedure
Director’s meetings o Decisions are made and resolutions passed o Rules governing meetings are set out in replaceable rules (RR) S 248G (RR): resolutions passed by a majority of votes and Chair has casting vote if necessary( s 248 G(2) ) All directors MUST receive “reasonable” notice that a meeting is to take place BUT if meetings are usually held at regular fixed dates, there is no need for notice May pass resolution without meeting (S 248A) o Signed statement by all directors that they are in favour of resolution o Adopted when last director signs
o
Directors may use separate documents as long as wording of resolution and statement is same Same goes for sole director of single director proprietary co o Just records and signs resolution Notice of meeting o Reasonable notice to every director (S 248C) (RR) o Clear and full summary of business to be discussed Otherwise proceedings of meeting may be void (Jenashare Pty Ltd) Quorum o S 248F (RR) - 2 directors entitled to vote on the relevant matters and they MUST be present through out the whole meeting Conflicted director not counted towards quorum o Constitution may allow for only 1 (Gosford Christian School Ltd) Mancini v Mancini (1999)
Facts:
Divorced husband and wife were the only directors of 3 companies. Wife wanted to remove husband as director at meetings where husband was not present and made resolution to do so
Held:
Resolution invalid due to lack of quorum as constitution provided for a quorum of 2
Minutes o
S 251A (1) (b) - Proceedings and resolutions of meetings MUST be recorded in the minute book and the Chair must sign the book within a reasonable time following the meeting
Sub-committees o
Board may delegate functions to sub-committees
o
Delegation must be recorded in minute book (s 251A)
Audit
Remuneration
Nomination
Appointment of directors
Public company must have 3 directors, proprietary company 1 o At least 1 director (proprietary company) and 2 directors (public company) must be ordinarily resident in Australia Only natural persons above the age of 18 (s 201B) o Although another co (e.g. holding co) may be shadow director, it may not be appointed as a director Director may also be company secretary No statutory share qualification – may be stipulated by constitution Cannot be appointed without consent Company must receive and retain signed consent form (S 201D)
o Does not need to lodge it with ASIC Lodge notice of personal details (name, date and place of birth, address) with ASIC within 28 days after appointment (director, alternate director and secretary) o Notify ASIC of any change in personal details
Disqualification
Automatic OR By Court (upon application) OR By ASIC Designed to protect public from persons who: o Committed serious offences o Committed offences relating to the promotion or management of corporations o Involved in failed corporations o With a record of bankruptcy or failure to comply with schemes of arrangement or composition Rich v ASIC (2005) ACSR 242; ASIC v Vizard [2005] FCA 1037: o Protect o Punishment o Deter
Disqualified person commits an offence if s/he(s 206A(1)):
Make or participates in making of decision that affects the whole or a substantial part of the business of the company Exercise the capacity to affect significantly the corporation’s financial standing Acts as a shadow director (communicates instructions or wishes that directors normally implement - or intending them to implement them) CAC v Bracht: More than mere clerical or administrative acts but need not involve the exercise of control – negotiating credit facilities on behalf of co may suffice
Automatic disqualification S 206B(1) – disqualified if convicted on indictment of offence: Concerning making or participation in making of decision that affect the whole or a substantial part of the business of the company OR Concerning an act that has the capacity to affect significantly the corporation’s financial standing OR That is a contravention of the Act and is punishable by imprisonment for more greater than 12 months OR Involving dishonesty and punishable by imprisonment for at least 3 months OR Against the laws of a foreign country punishable by imprisonment for a period greater than 12 months
Period: o 5 years from date of conviction (if no imprisonment) o 5 years from date of release (if imprisoned) May be extended by Court on ASIC’s application for up to an additional 15 years – s 206BA
Regime extends to undischarged bankrupts (see next slide) and directors disqualified by foreign court order
Undischarged bankrupt o Including persons who entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth) and failed to fulfill the related obligations
Period: o Until discharged or Court permits person to act (upon application) o Sole shareholder/director? Trustee may appoint someone to act as director
Disqualification by Court On application by ASIC – in four cases When? o A Contravention of civil penalty provision of Act (insolvent trading, insider trading, directors duties etc) AND Court is satisfied that disqualification is justified (s 206C) Disqualification for period Court considers appropriate o B Officer of two or more companies in past 7 years that were insolvent or failed to pay their debt (s 206D): Court is satisfied that the manner in which corporation was managed was wholly or partially responsible for failure and that disqualification is justified Disqualification for up to 20 years When? (cont) C Repeated contravention of Act (s 206E) o Twice been officer of corporation contravening Act and each time person failed to prevent it; OR o The person contravened Act at least twice while an officer, OR o While an officer of a body corporate did something that would have constituted a contravention of ss 180 or 181 of Act if body was a company Court must be satisfied that disqualification is justified Disqualification for period Court considers appropriate o UNLIKE automatic disqualification, there is no fixed duration of disqualification D Disqualification under law of foreign jurisdiction (s 206EAA
Santow J in ASIC v Adler (2002) set out factors which have led to the longest periods of disqualification: o large financial losses o high likelihood that person will continue to engage in similar conduct o activities caused or had potential to cause great harm o lack of contrition or remorse o disregard for the law o dishonesty and an intention to defraud o previous contraventions
Board
Company
General meeting
Board (all directors): S 198A(1) (replaceable): “business of the company is to be managed by or under the direction of the directors” May delegate General meeting (GM) (body of shareholders) Appoints and may refuse to re-elect directors Exercises statutory and constitutional powers
Division of powers o Modern view - board is not simply an agent of the general meeting History Automatic Self-Cleansing Filter Syndicate Co Ltd (par 12.85) o GM has powers conferred by CA and constitution o Doctrine of the supremacy of the constitution Management powers vest in board unless constitution determines otherwise (par 12.75) GM may be allowed to intervene in exceptional circumstances o Which organ is the most powerful?
Directors
All companies have directors who are collectively called “the board of directors” Minimum number: o Proprietary companies: One director ( s201A (1) ) o Public companies: Three (s 201A (2) ) Initial directors are those whose names appear on with their consent on the application for registration
Who is a director? Section 9 definition: a person who is appointed to the position of director or alternate director OR if not validly appointed and: o He or she acts in the position of the director – a driving force behind the company (de facto director) or o the other directors are accustomed to act in accordance with the person’s instructions or wishes (shadow director) Not merely because person is properly giving professional advice or there is a business relationship with directors or company
o
De facto and shadow directors are included for purposes of liability, not powers
De facto director Persons acting as directors although they are disqualified (lacked a required share qualification) or certain appointment formalities were not complied with etc o CAC v Drysdale (1978) 141 CLR 236: Where director’s appointment terminated but he carried on acting as director o Deputy Commissioner of Taxation v Austin (1998) ACLC 16 1,555: Director resigned but failed to file notice with ASIC and continued to carry out some functions Whether person acts as a de facto director is a question of fact Shadow director Puppet master: Persons whose instructions are normally followed by the board of directors
Must control board rather than single director – Re a Company [1989] BCLC 13 o Perhaps sufficient to control the majority vote at the board? Can include a company exercising such power – e.g. a holding company o Standard Chartered Bank of Australia v Antico (1995) 13 ACLC 1381 Excludes professional advisors/consultants
Types of directors Managing director (CEO) in charge of daily business of the company responsible for senior executives Normally has wide authority to conclude business contracts on behalf of co Chair of directors Appointed by other directors to chair meetings Important function o Colorado Constructions Pty Ltd v Platus (1966): Two directors left a meeting after a brawl and the remaining directors purported to pass a resolution. This was challenged and the Court said this was invalid as no Chair had been appointed. o In charge of governance of professional operation of board – higher duty for functioning of the board – ASIC v Rich Executive directors: Take part in daily management of the company Senior managers with substantial control over the company’s activities Non-executive directors: Participate in board meetings to oversee and inform the activities of the management Alternate director: Stand in at board meeting for director when unavailable Not merely an agent of the director but has no powers when director is present Nominee director: Appointed by specific group or body (holding co, employees, creditor) to oversee board
For duties see par 13.2.55 (may act in nominator’s interest unless that conflicts with interests of co)
Functions and powers of the Board
Board sets the direction of the company and holds management accountable o Powers are determined by replaceable rules (RR), company’s constitution (if it has one) and Corporations Act o Responsibility of board See list on page 314-314 See figure 12.1 for powers
Management powers
S 198A (RR) states that the business of a company is to be managed by directors o Broad power which can include changing the direction of a company or selling the only business carried on by it Strong: Directors DO NOT have to get shareholders’ approval to sell However under ASZ Listing Rules shareholder approval is required if a listed company proposes to make significant change to the nature/scale of its activities
Shareholders cannot override management Shareholders cannot involve themselves in the management of the company Automatic Self- Cleansing Filter Syndicate Co v Cunninghame (1906) Facts:
Held:
Directors were ordered by general meeting of members to sell the company’s property Directors refused, relying on constitution Constitution gave management powers to the board of directors including power to sell property. Members could not interfere as they were contractually bound by the constitution
Separation of ownership and control in co Ownership vests in shareholders Control vests in board
Board procedure
Director’s meetings o Decisions are made and resolutions passed o Rules governing meetings are set out in replaceable rules (RR) S 248G (RR): resolutions passed by a majority of votes and Chair has casting vote if necessary( s 248 G(2) ) All directors MUST receive “reasonable” notice that a meeting is to take place BUT if meetings are usually held at regular fixed dates, there is no need for notice May pass resolution without meeting (S 248A) o Signed statement by all directors that they are in favour of resolution o Adopted when last director signs
o
Directors may use separate documents as long as wording of resolution and statement is same Same goes for sole director of single director proprietary co o Just records and signs resolution Notice of meeting o Reasonable notice to every director (S 248C) (RR) o Clear and full summary of business to be discussed Otherwise proceedings of meeting may be void (Jenashare Pty Ltd) Quorum o S 248F (RR) - 2 directors entitled to vote on the relevant matters and they MUST be present through out the whole meeting Conflicted director not counted towards quorum o Constitution may allow for only 1 (Gosford Christian School Ltd) Mancini v Mancini (1999)
Facts:
Divorced husband and wife were the only directors of 3 companies. Wife wanted to remove husband as director at meetings where husband was not present and made resolution to do so
Held:
Resolution invalid due to lack of quorum as constitution provided for a quorum of 2
Minutes o
S 251A (1) (b) - Proceedings and resolutions of meetings MUST be recorded in the minute book and the Chair must sign the book within a reasonable time following the meeting
Sub-committees o
Board may delegate functions to sub-committees
o
Delegation must be recorded in minute book (s 251A)
Audit
Remuneration
Nomination
Appointment of directors
Public company must have 3 directors, proprietary company 1 o At least 1 director (proprietary company) and 2 directors (public company) must be ordinarily resident in Australia Only natural persons above the age of 18 (s 201B) o Although another co (e.g. holding co) may be shadow director, it may not be appointed as a director Director may also be company secretary No statutory share qualification – may be stipulated by constitution Cannot be appointed without consent Company must receive and retain signed consent form (S 201D)
o Does not need to lodge it with ASIC Lodge notice of personal details (name, date and place of birth, address) with ASIC within 28 days after appointment (director, alternate director and secretary) o Notify ASIC of any change in personal details
Disqualification
Automatic OR By Court (upon application) OR By ASIC Designed to protect public from persons who: o Committed serious offences o Committed offences relating to the promotion or management of corporations o Involved in failed corporations o With a record of bankruptcy or failure to comply with schemes of arrangement or composition Rich v ASIC (2005) ACSR 242; ASIC v Vizard [2005] FCA 1037: o Protect o Punishment o Deter
Disqualified person commits an offence if s/he(s 206A(1)):
Make or participates in making of decision that affects the whole or a substantial part of the business of the company Exercise the capacity to affect significantly the corporation’s financial standing Acts as a shadow director (communicates instructions or wishes that directors normally implement - or intending them to implement them) CAC v Bracht: More than mere clerical or administrative acts but need not involve the exercise of control – negotiating credit facilities on behalf of co may suffice
Automatic disqualification S 206B(1) – disqualified if convicted on indictment of offence: Concerning making or participation in making of decision that affect the whole or a substantial part of the business of the company OR Concerning an act that has the capacity to affect significantly the corporation’s financial standing OR That is a contravention of the Act and is punishable by imprisonment for more greater than 12 months OR Involving dishonesty and punishable by imprisonment for at least 3 months OR Against the laws of a foreign country punishable by imprisonment for a period greater than 12 months
Period: o 5 years from date of conviction (if no imprisonment) o 5 years from date of release (if imprisoned) May be extended by Court on ASIC’s application for up to an additional 15 years – s 206BA
Regime extends to undischarged bankrupts (see next slide) and directors disqualified by foreign court order
Undischarged bankrupt o Including persons who entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth) and failed to fulfill the related obligations
Period: o Until discharged or Court permits person to act (upon application) o Sole shareholder/director? Trustee may appoint someone to act as director
Disqualification by Court On application by ASIC – in four cases When? o A Contravention of civil penalty provision of Act (insolvent trading, insider trading, directors duties etc) AND Court is satisfied that disqualification is justified (s 206C) Disqualification for period Court considers appropriate o B Officer of two or more companies in past 7 years that were insolvent or failed to pay their debt (s 206D): Court is satisfied that the manner in which corporation was managed was wholly or partially responsible for failure and that disqualification is justified Disqualification for up to 20 years When? (cont) C Repeated contravention of Act (s 206E) o Twice been officer of corporation contravening Act and each time person failed to prevent it; OR o The person contravened Act at least twice while an officer, OR o While an officer of a body corporate did something that would have constituted a contravention of ss 180 or 181 of Act if body was a company Court must be satisfied that disqualification is justified Disqualification for period Court considers appropriate o UNLIKE automatic disqualification, there is no fixed duration of disqualification D Disqualification under law of foreign jurisdiction (s 206EAA
Santow J in ASIC v Adler (2002) set out factors which have led to the longest periods of disqualification: o large financial losses o high likelihood that person will continue to engage in similar conduct o activities caused or had potential to cause great harm o lack of contrition or remorse o disregard for the law o dishonesty and an intention to defraud o previous contraventions
