Further, the single page purchase and sale agreement was prepared by Bernadette and Charles without being reviewed by any legal professionals. The agreement only briefly narrates who the parties are, which seems to be under-prepared for a $200 million sale. As no facts suggest that Bernadette or Charles had had any professional legal training, a reasonable director in Bernadette’s position should have sought advice from lawyers in the preparation of this agreement. Again in failing to do so Bernadette appears to have acted negligently.
As a result, Bernadette has failed to satisfy the requisite standard of care. Supported by her improper use of her position in Acme (discussed below), she has breached her common law and statutory duty of skill, care and diligence. However, the statutory business judgment rule might apply as a defence to both common law and statutory duty of care and diligence if certain conditions are satisfied. Regarding Bernadette‘s involvement in the sale to DIL consists of a material personal interest, being the entitlement to the management fee from DIL. Therefore her case fails to satisfy s180(2)(b), and accordingly it provides no defence for Bernadette for her negligent conduct.
On the other hand, Charles has acted for DIL under these facts and hence there are no information suggesting that he has breached his duty of care owed to Acme.
Issue Two: Common Law and Statutory duty to act in good faith in the best interests of the company (S 181(1)(a))
This duty applies to both Bernadette and Charles. This duty requires them to act in the best interest of Acme, being the interests of the shareholders as a ‘general body’ on an objective basis. It may also require disclosure of information material to decision being made by the company and non-participation in decision-making.
In the present case, the sale and the issue of shares have resulted in saving Acme’s to report a loss on their Indonesian investments, which will increase the likelihood of minimizing the negative impact of reported losses on its share price. This appears to be in Acme’s best interest.
However, the personal gain of $2 million has attracted the issue of good faith. The management fee can explain the underlying motive of the sale and the issue of shares as using Acme as a tool to obtain personal gain dishonestly. In fact, as Bernadette and Charles already owed Acme a duty to ensure Acme sold the Indonesian companies at the highest possible price, from Acme’s perspective Bernadette should not be concerned about DIL’s losses and therefore should not have promised issue shares to DIL. The email unveils that Bernadette intended to honour the promises she previously made to DIL’s investors and by that to ensure she would be entitled to significant management fees. Moreover, their breach of duty becomes more probable if the issue of shares results in dilution of the rights of Acme’s existing shareholders. Further, as the sale amounts to market manipulation, such finding supports the B’s failure to act bona fide in the interests of Acme and to act honestly.
As a result, facts indicate that Bernadette and Charles have not acted in good faith of Acme, as supported by Bernadette’s misuse of her position in Acme (discussed below).
Issue Three: Common Law and Statutory duty to act for proper purposes (S 181(1)(b))
This duty applies to both Bernadette and Charles but Bernadette appears to be the only relevant party. Assuming Bernadette in her position as the Finance Director of Acme has the power to issue shares, it is necessary to examine whether the power has been exercised for an improper purpose. Facts suggest that Bernadette may have had mixed purposes in issuing shares to DIL. In this case the ‘but for’ test is the dominant authority.
One of Bernadette’s purposes of issuing shares to DIL was to cover DIL’s losses and accordingly to ensure she would receive her management fee, which is arisen from self-interest and therefore improper. But for this improper purpose, there appears to be no other legitimate purposes for Bernadette to issue such shares to DIL, considering there is no genuine necessity for Acme to obtain immediate finance from DIL. Therefore, together with Bernadette’s misuse of her position in Acme, these findings indicate that she has breached her duty for acting for improper purposes.
Issue Four: Common Law duty of loyalty to avoid conflicts of interests
This duty applies to both direct and indirect interests of Bernadette. Firstly, a breach of this duty requires a real and sensible possibility of conflict that is objectively ascertained, rather than the mere potential for such. The issue of Acme’s shares to DIL in the present case was entirely motivated by Bernadette’s remuneration, which is in clear conflict with the interest of Acme’s shareholders. Secondly, where conflict exists, Bernadette can act if she makes adequate disclosure and obtains the consent of Acme, or any other steps that are reasonable upon the circumstances. Bernadette, however, has not disclosed this matter to Acme’s board of directors. In fact, from Bernadette’s conduct it seems likely that she deliberated concealed such matter from the knowledge of Acme’s management. Therefore Bernadette has failed to avoid conflicts of Acme’s interests and her own interests.
Issue Five: Statutory duty to disclose material personal interest (s 191)
A similar statutory duty also requires Bernadette to disclose any material interest in matter regard Acme’s affairs. As discussed previously, Bernadette has a material personal interest in Acme’s affairs, being the issue of shares to DIL. As no relevant statutory exemptions are applicable in the present case, Bernadette’s failure to disclose the matter constitutes a breach of the statutory duty to disclose material interest.
Issue Six: Statutory restrictions on related party transaction (s208)
Acme, as a publicly listed company, cannot give financial benefit to its related party unless there is shareholders’ approval or statutory exceptions apply.
In the present case, a promise to issue Acme’s shares to DIL amounts to a financial benefit as it does not require a binding agreement. Such benefit is given to DIL as a related party because DIL is effectively controlled by Bernadette and Charles.
Regarding the arm’s length transaction exception to disclosure, as Acme was to issue shares to DIL without consideration, such dealing does not appear to be in arm’s length terms. Also, it appears to be unreasonable in the circumstances for Acme to issue its shares to DIL to merely cover DIL’s losses without shareholders’ approval.
Accordingly, Bernadette has breached s208(1) for failing to obtain shareholders approval for the issue of shares to DIL.
Issue Seven: Statutory Duty not to improperly use position to gain advantage for self or another, or cause co detriment s182
This duty applies to all employees of Acme, which includes Bernadette and Charles. The question as to whether they have improperly used their positions is ascertained objectively. Also, employee’s motives or intention is irrelevant and hence his/her lack of intention to cause company’s detriment does not provide the person a defence as long as that person benefited.
Bernadette’s failure to disclose to Acme her material personal interest in DIL indicates a breach of such duty. In any event, it is not necessary that she or others actually obtains the actual advantage. Besides, Bernadette and Charles both had told prospective investors of DIL that their roles in Acme would assist them to gain substantial profits and gained their trusts. Also, Bernadette promised to issue Acme’s shares to DIL without consideration in order to ensure DIL’s investors were satisfied with her performance. Clearly Bernadette and Charles have used their positions in Acme to obtain person advantage.
The fact that they have failed to fully disclose their personals interests to Acme and to obtain consent from Acme evident their improper use of their positions in Acme in breach of their duties owed to Acme. As discussed previously, their breach of such duty can also entail a breach of statutory duties under s180 and s181.
Issue Eight: Statutory duty not to improperly use information obtained as a result of position to gain advantage or cause co detriment s183
Similar to s182, Bernadette and Charles informed investors that their executive roles in Acme would put them into an “advantageous position to analyze potential investments for DIL” for the benefit of DIL. This clearly indicates a self-admittance of their use of information obtained from Acme to benefit DIL. Without proper disclosure they have breached s 183.
Conclusion
Based on the breach of duties of Bernadette and Charles as established above, Acme may apply for compensation for breach of statutory duties as well as general law breach of duties. Also, some of the breaches amount to criminal offences due to dishonesty.
Nevertheless, the essential question of whether the company should sue Bernadette and Charles persists. In this incident Acme’s financial position has been improved as a result of their conduct, but at the same time they have used the company to benefit themselves. If these conducts are not to be desisted and discouraged, it might implicitly encourage such conduct in the future, which may ultimately cause harm to Acme. In any event, as Acme’s counsels we owe a duty to and are held accountable to Acme’s shareholders’ best interests. Therefore we should continue our independence from the company’s management.
With respect to the present case, a number of responding actions are suggested as follows.
Firstly, we can inform Bernadette and Charles of their breach of duties owed to Acme and we can request them to rectify the problematic situation, such as to make the appropriate disclosures to the company, rescission of the contract of sale with DIL, etc. If Bernadette and Charles refuse to adopt the suggested actions, we can inform independent directors and committees in Acme’s board of directors of their breach of duties and therefore force them to rectify the situation as mentioned. Should the board of directors not willing take action upon the acknowledgment of Bernadette and Charles’s breaches, we should then consider notifying the relevant authorities of their breaches in order to preserve our independence to Acme’s management.
Besides, we should re-consider the credibility of Edgar, and if necessary we should consider changing to a more trustworthy lawyer or law firm. Finally, the present case reveals that Acme lacks effective codes of conduct in place and therefore it is recommended that newly designed codes of conduct should be implemented. The new system should include trainings to all employees (particularly senior management) about their duties, and also consists of reporting mechanisms which gather information of potential breach of duties and notify the board of directors, as well as internal disciplinary mechanisms for breach of duties owed to the company.
Daniels v Anderson per Clarke and Sheller JJA.
Daniels v Anderson per Clarke and Sheller JJA.
s1041A - Although after this sale there is Acme will still have to report a loss on other business areas, without having to report its losses on Indonesian investments will reduce the potential negative impact on Acme’s share price. In the present case, whether there is market manipulation depends on the motive of the sale. If it was to minimize reportable losses which may affect its share price then it could amount to market manipulation. As present facts indicate that the setting up of DIL is one of Bernadette and Charles’ innovative solutions to prevent Acme having to report its first ever loss, s1041A is breached.
Greenhalgh v Arderne Cinemas Ltd (1946) 1 All ER 512
Equiticorp Finance v BNZ (93) NSW
State of SA v Marcus Clark
(obiter in Whitehouse - Whitehouse rejected a ‘dominant purpose’ test advocated in Ngurli, Mills, Harlowe’s.
ASIC v Adler; R v Byrnes.