Corporate governance exercise

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Facts

Various conduct by Bernadette and Charles raise concerns of breaches of directors’ duties on their part. The conduct in issue essentially include the information disseminated by Bernadette and Charles to prospective investors of Dextrous Investments Pty Ltd (“DIL”), the sale of shares in Indonesian electricity companies held by Acme Energy Limited (“Acme”), Bernadette’s unilateral undertaking of issuing Acme’s shares to DIL to cover DIL’s loss in the sale, and the purchase and sale agreement prepared and signed by Bernadette and Charles.

Roles

As Bernadette is a director of Acme, she owes general law and statutory duties to Acme. Charles, on the other hand, is not a director under the statutory definition. Nevertheless, his position as the Deputy Chief Financial Officer (“DCFO”) of Acme indicates that he, being part of Acme’s senior management, has the capacity to affect Acme’s financial standing, or participates in making decisions that affect the whole or a substantial part of the business of Acme. Accordingly, Charles is an officer of Acme and therefore he also owe duties to the company.

Issue One: Common law and Statutory duty of care, skill and diligence (S 180 (1))

Common law and statutory duty of care are equivalent, except where the statutory duty applies to both directors and other officers of the company. Under common law, there is no uniform standard of care but the minimum requirement of care is what a reasonable person, being objectively ascertained, in the director’s position in particular company would exercise. Considerations should also be awarded to factors such as the specific tasks delegated and the ways in which the work is actually distributed within the company, as well as the particular director’s experience and skills. Also, a slightly higher standard of care might be required for her executive director as compared to non-executive directors.

Accordingly, we should firstly acknowledge Bernadette’s role in Acme as the Chief Financial Officer (“CFO”) gives her executive powers to the operations of Acme. In the present case, Bernadette sold shares in the loss-making Indonesian businesses held by Acme to DIL at a profit of $60 million. This transaction saves Acme’s need to to report a loss on the Indonesian investments by boosting its non-recurring revenue in this reporting period, which ostensibly appears to be completed with reasonable skill and care. In doing so, however, Bernadette has probably violated the prohibition on market manipulation for her control in Acme’s share price by artificial means. A reasonable director in Bernadette’s position should be vigilant of this prohibition and therefore should have discouraged this transaction, or at least should have sought advice from Acme’s legal department or external lawyers. Also, Bernadette should have informed the board about this important transaction to avoid potential breach of regulations.

In addition, Bernadette via an email to Charles unilaterally provided a guarantee to DIL to cover their losses incurred in the sale by issuing Acme’s shares without consideration. As this dealing appears to be unreasonable, Bernadette should have disclosed her decision to Acme’s board of directors or in shareholders’ meeting and seek for approval. In failing to do so Bernadette’s conduct appears to be negligent.

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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. ...

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