Deck 9: PART B: Directors and Officers Duties

Question 1

If a company is insolvent or nearing insolvency, an obligation arises for the directors to act in the interests of the creditors of the company.

Answer 1

True

Question 2

If a director has a material personal interest in a matter that relates to the affairs of the company then in all circumstances that director must disclose the nature and extent of the interest to the other directors.

Answer 2

False

Question 3

Jose, Jin and Mary are the directors of Umbrella Nation Ltd - a company which sells umbrellas and raincoats. Luke owns 51% of the shares in Umbrella Nation Ltd and is threatening to call a meeting to vote Jose, Jin and Mary off the board. In order to avoid being removed from office by Luke, the board pass a resolution to issue a number of shares to Jin's friend Larry. After the shares have been issued, Larry owns 51% of the shares and Luke has been diluted to owning 25%. It would be highly unlikely that the directors have breached any of their duties to Umbrella Nation Ltd as directors have the power to issue shares.

Answer 3

False

Question 4

If a director breaches section 181 of the Corporations Act, then it is possible the director could face criminal sanctions.

Question 5

Olympia is a director of Trade Toys Ltd and also is the sole shareholder of LittleKids Pty Ltd. Olympia owns no shares in Trade Toys Ltd and is not a director, officer or employee of LittleKids Pty Ltd. Trade Toys Ltd enters into a large contract with LittleKids Pty Ltd. Olympia makes no disclosure of her interest in LittleKids Pty Ltd to the directors or shareholders of Trade Toys Ltd. It is likely Olympia has breached her duty to LittleKids Pty Ltd to avoid a conflict of interest.

Question 6

Theodore is a director of Big Bike Pty Ltd. Theodore has a material personal interest in a large contract which Big Bike Ltd is planning to enter. In order to satisfy his obligations under section 191 of the Corporations Act, Theodore needs to disclose the nature and extent of his interest in the contract to Big Bike Pty Ltd's shareholders.

Question 7

Marly is a janitor employed by Large Bank Ltd ("Large Bank"). Large Bank is an Australian bank headquartered in Sydney. While cleaning the CEO's office, Marly stumbles across some documents showing Large Bank is going to purchase some residential land in Brisbane to build a new head office. Marly thinks it would be a great idea if she purchased the residential land before Large Bank's plan became known because she thinks the value of the land will materially appreciate once everyone is aware Large Bank is relocating. Marly has nothing to worry about in carrying out her plan because, as an employee, she owes no duties to large Bank

Question 8

Maribelle and Deigo are the only directors of PlantMart Pty Ltd ("PlantMart"). PlantMart is in the business of selling horticultural products. Zahara sells plants wholesale. She has a lot of small shrubs she needs to sell quickly. She approaches Maribelle and asks her if PlantMart would be interested in buying the shrubs at half price. Maribelle thinks this is a great deal and buys the plants herself and sells them and makes a large profit for herself. Which of the following is true:

A) Maribelle has breached her duty to act in good faith and in the best interests of the company.
B) Maribelle has breached her duty to avoid a conflict of interest.
C) Maribelle has breached her duty under section 181 of the Corporation Act.
D) Maribelle has not breached her duty under section 181 of the Corporations Act.
E) While it is uncertain as more facts are needed, it is possible that (a), (b) and (c) could be correct.

Question 9

Sahil is a director of Dog Toy Pty Ltd, a company which makes and sells plastic dog toys. Sahil is also a majority shareholder in Aussie Plastic Ltd, a company which sells plastic products. The other directors of Dog Toy Pty Ltd have been aware for some time that Shail is a majority shareholder in Aussie Plastics Ltd. Dog Toy Pty Ltd entered into a significant contract with Aussie Plastics Ltd to buy plastic for the manufacture of the dog toys it is producing. Which of the following is correct about Sahil's obligations under section 191 of the Corporations Act.

A) The only way Sahil can satisfy his obligations under section 191 is by giving notice to the other directors of the nature and extent of his interest in Aussie Plastics Ltd.
B) Sahil does not have any obligation under section 191 because Dog Toy Pty Ltd is a proprietary company and section 191 only applies to public companies.
C) Because Dog Toy Pty Ltd is a proprietary company, section 191(2)(b) would apply, and since the other directors are aware of the nature and extent of Sahil's interest in Aussie Plastics Ltd he is exempt from making disclosure under section 191(1).
D) If Sahil was required to make disclose under section 191, he could not be present at any meeting where the contract with Aussie Plastics Ltd was being discussed.
E) This is a related party transaction and shareholder approval needs to be obtained before the contract is entered into.
F) Both (a) and (e) are correct.

Question 10

Which of the following would be deemed a related party for the purposes of Chapter 2E of the Corporations Act.

A) Directors of public companies;
B) Directors of an entity that controls the public company;
C) Spouses, children and parents of the directors in (a) and (b);
D) An entity that controls the public company;
E) An entity controlled by any party referred to in (a), (b), (c) and (d);
F) Only (a), (b) and (c);
G) All of (a), (b), (c), (d) and (e).

Question 11

Yang is a director of a public company and is concerned that he may have breached his fiduciary duty to avoid a conflict of interest. In order for Yang to avoid liability he should;

A) Not say anything and hope none of the shareholders notice.
B) Make full disclosure to the company at a general meeting and get approval from the members in the form of a resolution approving the transaction in issue.
C) Make disclosure of the issue to his fellow directors.
D) Alert ASIC to the issue, make full disclosure to ASIC and get a waiver from ASIC.
E) There is nothing he can do. The rules relating to conflicts of interest are strict and Yang should never have placed himself in that position.

Question 12

The constitution of Mouse Pads Pty Ltd provides that Warren is entitled to nominate one director to the board. Warren appoints Lester to the position. At a recent board meeting, the Chair proposes that the company enter into a transaction to acquire another company called Squeaky Cat Ltd. The Chair distributes some documentation about Squeaky Cat Ltd and says that at the next board meeting the board will vote on the acquisition.
Lester looks at the documentation and believes that Squeaky Cat Ltd is a terrible company and Mouse Pads Pty Ltd would lose a lot of money if they acquired Squeaky Cat Ltd. Lester speaks to Warren about the proposed transaction. Warren says he is very familiar with the Squeaky Cat company and under no circumstances should Lester vote in favour of the transaction.
Which of the following is correct:

A) If Lester votes against the transaction, he would be breaching his duty to act in good faith and the best interest of the company because he would be following Warren's directions.
B) Even if Lester was of the view that the transaction was in the best interests of Mouse Pads Pty Ltd, he could vote against the transaction because Warren appointed him to the board and he owes fiduciary duties to Warren and is obligated to follow his directions.
C) Because Lester has a reasonable belief that voting against the transaction is in the best interest of Mouse Pads Pty Ltd, he can vote against the transaction.
D) If all the other directors vote in favour of the transaction, this is proof that the transaction is in the best interests of Mouse Pads Pty Ltd and, in those circumstances, if Lester votes against the transaction he would breach his duty to act in good faith and the best interests of the corporation.
E) Lester has a material personal interest in the transaction and should not participate in any board discussion concerning the matter.

Question 13

Under what circumstances can a director of a public company who has a material personal interest in a matter being considered by the board be present and/or vote at the board meeting?

Question 14

What are the disclosure obligations of a director of a proprietary company who has a material personal interest in a matter being considered by the board?

Question 15

What is 'good faith' in the context of fiduciary duties of directors and officers?

Question 16

What does the 'best interests of the company' mean?

Question 17

Why is the decision in Equiticorp Finance Ltd (in liq) v Bank of New Zealand important

Question 18

When will the exercise of a power by director to issue shares be a breach of the duty to act for a proper purpose?

Question 19

When does a director's conflict arise?

Question 20

Under what circumstances can a director of a public company who has a material personal interest in a matter being considered by the board be present and/or vote at the board meeting?

Question 21

What are the disclosure obligations of a director of a proprietary company who has a material personal interest in a matter being considered by the board?

Question 22

What is the difference between the consequences for a director's breach of the statutory duty of care and the director's breach of the statutory duty of good faith?