BA - After MidSem

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11. Directors duty to avoid conflicts:Directors fiduciary duty: 1) 2) Duty of good faith last week Duty to avoid situations where, without the consent of the company, the directors personal interest The tiers of rules affecting directors interests in transactions with their company p494

1) 2) 3)

Equitable principle to avoid conflict irrespective of fairness of transaction from companys perspective (Furs Ltd v Tomkies ) - making the transaction voidable Provisions in company constitutions modifying equitable rules Statutory duty of disclosure imposed by the Act

Replaceable rule s194: may validate transactions that would be invalidated by the equitable principle because of Ds interests in them. Restriction upon board participation by interested directors of public companies: p496

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S195(1) D must not be present while matter considered at meeting or vote Except: where the interest is exempted from disclosure under s191(2) OR s195(2) other Ds pass resolution that i) identifies D & nature & extent of interest and ii) theyre satisfied interest shouldnt disqualify him.

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S195(3) ASIC approves, want of quorum & compelling reason urgency If D with material person interest also possess confidential information relevant to a matter before the board disclosure and non-participation may not be sufficient in the circumstance (PBS v Wheeler ).

Aberdeen Railway v Blaikie (1854) personal interest vs. fiduciary duty= conflict of interest

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Partnership sued railway company for non-performance of contract, company sought to avoid performance on grounds that D of company was also a member of the partnership. Held: Blaikie was both chairman of company and member of partnership. His duty to company is to obtain chairs at lowest price whilst his personal interest would induce him to obtain the best price possible as far as the advice he should give them, he put his interest in conflict with his duty (irrelevant if hes sole D or one of many).

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No one, having such duties to discharge, shall be allowed to enter into engagements in which he has - the inability to contract depends not on the subject matter of the agreement, but on the fiduciary character of the contracting party.

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Need material interest and some element of control/influence over transaction Whether the transaction/outcome was fair is irrelevant

Imperial mercantile Credit v Coleman: p498

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C a stockbroker and also D of plaintiff company, contracted debentures at 5% commission, he offered P only 1.5% and did not inform P of his deal, only said he was interested in the transaction. Art 83 Constitution: officer or D shall be vacated if he contracts with company without declaring his interest at the meeting.

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Held: D made adequate disclosure of interests for purposes under art 83, therefore agreement between C and P is valid. From the articles it shows that in the companys view it is better to have Ds who may advance the interests of the company by their connection and by the part which they themselves take in large money dealing, than to have someone who has no share in the transaction to advance such transactions, it is not up to the court to judgement which one is better but left to the company to form their own contracts.

The liquidators of the Imperial Mercantile Credit Association v Coleman (on appeal) - HL

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Declaration of interest = states what the interest is, not stating there is one D claiming to give validity to a contract which otherwise would be invalid must show that he has complied with the provisions of the clause, here, C did not comply, if Ps board had known that C was to receive 5% and yet P, bearing all the risks would only receive 1.5% then they would have declined it.

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Therefore art 83 can offer no protection, remedy = the source from which profit is derived is Constitution therefore he is liable for the whole profit which was obtained.

Transvaal lands v New Belgium Land and Development: p500

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Article: 2 directors should form a quorum and no contract or arrangement should be avoided, provided a director discloses the nature of his interest, but that no director could vote on the matter.

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Young, Samuel and Harvey were directors only Harvey and Young voted - Harvey failed to declare he was a trustee shareholder, and that he had just been appointed but not yet accepted directorship in D company. Company bought shares in D company, which as tightly held would cause price to inflate.

Held: As trustee shareholders, Harvey owed a duty to both the company and to the beneficiaries. Therefore, there was a conflicting personal interest. Provisions of article were not observed as Harvey had voted. Without Harveys vote, there is no quorum, and therefore contract was voidable. Fact that one of the directors (who formed the quorum) is interested as a shareholder is enough to invalidate the transaction unless Constitution permits and trustee of shares is material interest since you would make the best bargain for it.

Gray v New Augarita Porcupine Mines: p504

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G had exclusive management control of N, he issued himself shares as fully paid up at a discount and traded them at much higher prices. Companys board reconstituted, found out about outstanding claims; G declared his interest and did not vote.

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Held: G liable to pay N the profits from dealing. The director must declare the nature and extent of the interest and the relation of the interest to the affairs of the company. The amount of detail must depend upon the nature of the contract, or arrangement proposed, and the context in which it arises.

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The directors declaration must make his colleagues fully informed of the real state of things, it is material to their judgment that they should know not merely that he has an interest but what it is and how far it goes.

The fettering of board discretions: p555

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Directors must bring to bear an independent judgment in the exercise of their powers and cannot delegate discretionary powers without the sanction of the constitution, or from binding themselves as to the future exercise of powers.

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However, a board will be permitted to bind themselves to do whatever is required in the future to complete a transaction now.

Thorby v Goldberg

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Permissible for a board to make an agreement to allot specified shares for the purposes of bringing capital into the company, to effectuate the transaction being negotiated. There are instances, e.g. sale of land, where the proper time for the exercise of discretion is during negotiation, and not when contract is to be performed.

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Ratio: The proper time for D to decide whether their proposed action will be in the interest of the company as a whole is the time when the transaction is being entered into, and not the time when their action under it is required. If at the former time they are bona fide of the opinion that it is in the interest of the company that the transaction should be entered into and carried into effect, then they can bind themselves to do whatever under the transaction is done by the board.

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An undertaking given by a director that is within the scope of their contractual power and is in accordance with their duty of good faith is not an improper fetter on their future discretion, but merely the consequence of a previous exercise of that discretion.

London and Mashonaland v New Mashonaland: p557Company sought to restrain chairman from acting as a director of a rival company, chairman had made no undertaking that he was not to become a director of a similar company, nothing in the Constitution contained such restraint.

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Held: Nothing in the Constitution required chairman to give any part of his time to the business of company, not sufficient damage had been shown so no cause had bee made out There may be potential conflicts but until there is an actual conflict, these rules do not come in. Rationale: wide distinction b/w asking D to account for profit made out of his fiduciary relationship and asking D not to join board of competing company in case he breaches fiduciary duty in future.

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12. Directors duty not to make secret profitUse of position civil obligations: S182(1) Use of position: directors, other officer and employees of a corporation must not improperly use their position to: (a) Gain an advantage for themselves or someone else; or (b) Cause detriment to the corporation Civil penalty provision s1317E S183(1) Use of information: A person who obtains information because of they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a) Gain an advantage to themselves or someone else; or (b) Cause detriment to the corporation

Secret profits: the appropriation of corporate property, information and opportunity: p522A fiduciary is accountable for profit arising by reason of and in the course of his fiduciary office:

1) 2)

Where the benefit was obtained in circumstances where there existed a conflict or the significant

possibility of conflict between directors duty to company and personal interests Where the benefit was obtained or received by use or by reason of the office of director or of

opportunity or knowledge resulting from it. [Chan v Zachariah]. Disclosure of Material Facts Directors CANNOT use their position to profit, nor misappropriate company property unless all material facts have been disclosed and approved by the relevant company organ. Directors are generally treated as trustees of company funds and property