BLAW20001 Lecture Notes - Lecture 8: Telstra, Absolute Liability, Sausage Software
5 Jun 2018
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Lecture 8
CLAW Lecture 8 - duty to avoid conflicts of interest
Statutory duties: s182, s183, s191
Case law fuzzy about level of disclosure of conflict of interest
Difference between general law and statutory duties
S191, s195 provisions
S191: crime not to disclose certain things to board
S195: crime for public company director who has a conflict of interest to attend public company meeting and vote on
matter
Related party transactions: between company and related parties
-> civil penalty breach but not a duty
Have directors breached any duties? No
Can ASIC take any action? Yes
Statutory duties apply more widely than general law
General law: fiduciaries - senior officers who are in a position to exploit the vulnerabilities of others, people who are
liable
Statute:
->s182 and s183 - directors, officers and employees
-> S182: duty not to misuse position
S191:
-> in addition to general law duty of disclosure (does not replace)
-> only directors
-> duty of disclosure
Difference between general law and statutory duties:
-> different remedies
-> different people who can enforce
General law conflict rule
-> very strict duty
-> designed to protect shareholders
Can arise for example, when a director contacts with company (very common situation)
Director’s interest in the company may be direct or indirect
Example: through another company or partnership [Aberdeen Railway]
Same guy was director of Aberdeen Railway and was also a partner in Blakey Brothers
Held to be a breach of the duty to avoid conflicts of interests under general law because he was on both sides of the
transaction
Don’t need to be making a personal profit to be breaching this duty
Just needs to be a perception that your decision on behalf of company is tainted by outside influence, by some other
interest that you’re following that set of needs rather than the company’s needs
Taking a corporate opportunity or property:
Taking a corporate opportunity: how you as a director can divert into your own hands a possibility or profit that
probably belongs to the company
Example: Furs Ltd.; Cooks v Deeks; Pieso Silver Mines
Furs Ltd. and Tomkees?
Mr Tomkees worked for and was a director of Furs Ltd
find more resources at oneclass.com
find more resources at oneclass.com
Furs Ltd was selling its business or fur treatments to a company called Fur Dresses
Mr Tomkees knew the secret formula for treating furs
Furs Ltd was going to sell that secret formula to Fur Dresses
But instead, Mr Tomkees was going to work for Fur Dresses
Fur Dresses came to him saying “rather than us paying Furs Ltd for the secret formula, you know what the secret
formula treatment process is, so we’ll just pay you when you work for us”
Mr Tomkees said “great idea”
Mr Tomkees received money
When Furs Ltd discovered what Mr Tomkees had done, they sued him for breach of duty to avoid conflict of interest
When he was a director of Furs Ltd, he had to do the right thing of Furs Ltd and not of himself by enriching himself
from position of director
Cook v Deeks
Four guys who were equal shareholders of a railway company
And three of them didn’t like Cook
So what they did was created a new company
Then when the opportunity came to the old company, they declined it in the name of the old company and said “oh
that company doesn’t wanna do it but our new company does”
The effect of this was to cut Cook out of the profitability of this
Duty to avoid conflicts of interest is a duty owed to the company
It was to the company to sue the three directors who did the wrong thing
They had taken a corporate opportunity that belonged to the old company and diverted it to the new company
It wasn’t intended to hurt the old company, just Cook, but the outcome was that it did hurt the old company
Peso Silver Mines v Cropper
Mr Cropper was director of Peso Silver Mines
Often came over to this company to take up a mining lease for silver
Company declined opportunity to take up this silver mine offer
Later, Cropper was approached individually and it was offered to him personally and he took it up in his own name
It was profitable and the old company decided to sue him claiming he has breached his duty for taking up a corporate
opportunity
But the court said no, he did not take up the corporate opportunity and therefore was not in breach of his duty
It was a speculative thing; the company had declined the offer based on the company thinking it was not profitable
(they legitimately turned it down)
Cropper was personally willing to take the risk and his gamble paid off as it was profitable
-> director will be in breach even when company itself cannot take up the opportunity unless company agrees: Regal
[Hastings]
Regal Hastings v Gulliver
Tough on directors
Regal Hastings wanted to take up an opportunity but it didn’t have enough money
So directors agreed to be part of the deal that the company was getting involved with
Directors put in the rest of the money
This enabled the company to be part of the deal and directors became shareholders in this deal
It turned out that the company didn’t exploit that new possibility and the whole lot was sold
Company got profit from selling it on
Directors got profit from selling it on
Board was replaced
New board looked at actions of old board and accused it of conflict of interest
Directors defended themselves saying “look the company did not have enough money in its own right for themselves to
do it, we were helping it be part of this deal. If we hadn’t put our money in, it wouldn’t have been part of the deal at all.
And our profit when the whole lot went to plan b and was sold off was incidental, it wasn’t our objective in the first
place”
But the court still said “bad luck, you’ve breached your duty”
Rationale: you can’t let directors get a side profit on a company deal because then they might incentivised to say “oh
the company can’t afford it so we’re going to have to muscle in on this deal ourselves and get some of the benefits from
it”
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Claw lecture 8 - duty to avoid conflicts of interest. Case law fuzzy about level of disclosure of conflict of interest. S191: crime not to disclose certain things to board. S195: crime for public company director who has a conflict of interest to attend public company meeting and vote on matter. Related party transactions: between company and related parties. Statutory duties apply more widely than general law. General law: fiduciaries - senior officers who are in a position to exploit the vulnerabilities of others, people who are liable. >s182 and s183 - directors, officers and employees. > in addition to general law duty of disclosure (does not replace) Can arise for example, when a director contacts with company (very common situation) Director"s interest in the company may be direct or indirect. Example: through another company or partnership [aberdeen railway] Same guy was director of aberdeen railway and was also a partner in blakey brothers.
