Free Essay On Corporate Law

Corporate Law

Bill, the Managing Director of a Solartec, a subsidiary of the Solar International Group dealing in commercial solar panels and equipment, together with other senior executives learn about the sale of another company, which is their major competitor. They then decide to resign abruptly from Solartec and buy the competing company Aussie Solar. They do this without informing the board of their intentions whereas they also attempt to poach Solartec’s customers. In order to make their decision, they utilize company information entrusted to them. The requirements are the determination of legal rights that the board of Solartec has against Bill and the other executives for breach of fiduciary duty. The remedies and penalties that may be imposed on the former executives are also discussed.

The issue

The issue is concerned with breach of fiduciary duty, which is regulated by common law, as well as the provisions of the Corporations Act of 2001. The question is the remedies and legal rights available to the board of Solartec against its former executives.

The Law

The law applicable in this case is the Corporations Law, and specifically the Fiduciary Principle. In law, a fiduciary refers to a person who holds a legal, as well ethical relationship based on trust. This relationship exists between the person himself and another party or parties who may be either a group or a person. Usually, a fiduciary takes care of money on the behalf of another person. For a fiduciary relationship to exist, one party, usually in a vulnerable position, vests confidence, reliance, good faith and trust with another person whose aid, protection or advice is sought in some affair. Hence, in this relationship, a fiduciary must act only for the benefit and interest of the person who trusts.
A fiduciary duty is the greatest standard of care imposed either at law or at equity. A fiduciary must remain extremely loyal to the person to whom a duty of care is owed. This person is called a principal. Therefore, no conflict of duty must arise between the principal and fiduciary and the fiduciary is not expected to gain from his position unless with the principal’s consent. Under Australian law, a fiduciary’s obligations are divided into two: the duties imposed by common law and the statutory duties, or duties imposed by the Corporations Act.

Common law duties

Various duties are imposed by the common law also referred to as judges’ law. The first of these duties is the duty to act bona fide, or in good faith, in the company’s interests as a whole. The directors of the company or executives have a duty to act in good faith in the company’s interests. The test of compliance for this duty is a subjective honesty or good faith test. Directors are adjudged to have breached this duty where they subjectively fail to properly consider the interests of the company. One instance where this may occur is a director assuming that the interests of the company and their personal interests corresponds and hence, disregard the company’s interests as a separate entity. However, this test imports an objective standard. That is, what is considered reasonable from an objective bystander’s viewpoint. Thus, if the director does not consider the company’s interest in their mind but the transaction actually benefits the company, no breach of duty is assumed.

Duty not to act for an improper purpose

Directors or the executives must not use their powers towards an improper objective. This may include securing themselves an advantage. It may also refer to defeating the existing shareholders’ voting power through creating a new majority. A proper purpose for example, may include the raising of new capital and exploiting a commercially viable opportunity. In promoting the company’s interests, the executives may also promote their own interests indirectly.

Duty of care and diligence

Directors have a duty to be kept informed on the actual financial affairs of their corporations. These include the company’s solvency. Delegating the responsibility does not in any way diminish this responsibility. Directors cannot claim ignorance of the company’s affairs as a defense especially where this ignorance is of their own creation. Directors must therefore question any information that they receive in order to ensure that it actually represents the company’s position.

Duty to retain discretion

Directors must not place themselves in situations where they cannot make decisions in the company’s best interests. This includes engaging in commercial transactions where they are unable to make decisions for the company. For instance, transactions where they are forced to place other parties’ interest ahead of those of the company.

Duty to avoid conflict of interest

The corporation’s directors or management generally owes fiduciary duties to the company. Legally, this relationship is considered an important one. It is viewed as a duty of trust and of utmost good faith. Thus, directors must always put the company’s interests ahead of their own. The management should not place themselves in a position whereby they have or may in future have a personal interest that may be in conflict with the company’s position. This is because as the fiduciaries, the officers are bound to protect the interests of the company. A conflict of interest may be either direct or indirect. A direct conflict of interest arises where the executives or directors of the company have a personal interest in a company transaction. For instance, the company’s management is forbidden from entering into contracts with his company. This may be either directly, where the official contracts in a personal capacity, or indirectly where a company in which a director or manager is a major shareholder or director.

Duty not to disclose confidential information

The company’s directors and executives play a fiduciary role. This means that they are highly trusted with very sensitive information that if disclosed, would be detrimental to the company. The disclosure of this information may for instance render an advantage to competitors. An example of a breach in this case is the disclosure of the client or supplier detail where such information was given in strict confidence. Another example would be the engagement in insider trading by the directors and management who have inside knowledge of all the factors that may influence the price of shares and hence stand to benefit from this.

Duty not to abuse corporate opportunities

This duty means that it is imperative for the executives to avoid situations where their personal interests and those of the company compete. The executives for instance cannot run a competing business with that of the organization. The company’s executives may not exploit any such opportunity that comes their way. This is regardless of whether the company would itself have exploited this opportunity or not. An exception arises where it actually serves the company’s best interests for the company to pursue this benefit.

Provisions under statute or the Corporation Law of 2001

The main provisions that relate to the Corporations Act with reference to statutory duties of the company’s officers are contained under Chapter 2D of this act. These include duties of diligence and care, as well as good faith. They also include the abuse of position, as well as information plus also criminal offences. Hence, these provisions may include

Duty of care, diligence, and the rule of business judgment

The duty of care and diligence features in common law and under section 180(1) of the Act, it is reinforced even further. This section provides that directors, or other officers of the corporation, must exercise their powers and discharge their duties with the same degree of diligence and care a reasonable person would exercise if they were in those circumstances, and had the same responsibilities. The business judgment rule indicates the director must make a decision in good faith and for the right purpose. The officer must also not have a material personal interest in the issue. The officer must also be well informed on the subject matter and believe the judgment is in the corporation’s best interest.

Duty of Good Faith

This is contained in Section 181 and is in line with the fiduciary obligation to act bona fide for the company’s benefit. Thus, the executives must act honestly all the time, regardless of any other duty conflict. Officers may be in breach where they exercise power for an improper objective, despite their belief to be acting truthfully.

Duty not to make improper use of position

An officer may not use their position to gain an improper advantage either for themselves or for others. The director must also not cause any detriment towards the company. A director or officer may be held in breach of this provision if he engages in conduct aimed at gaining such advantage or causing detriment. This is irrespective of whether the benefit or loss occurs or does not.

Duty not to make improper use of information

This falls under section 183 and it states that a person, who obtains information by virtue of their position, must not use the information to obtain an advantage for themselves or others. They must also not bring about any detriment to the organization using this information. Whenever a director or executive officer contravenes this, then he is in breach of the provision.

Legal Rights of the Directors against Bill and the former officers

It is evident that Bill and the other officers are in breach of their fiduciary duties both under common law and under the Corporations Act. Hence, the Board of Directors has specific legal rights, which they can institute against Bill and his fellow executives. The first right available to the directors is the right to institute criminal proceedings against Bill and the executives. The Board may decide to pursue criminal charges against the executives. Bill is criminally liable to prosecution for the commission of various offences. The Board has a right to institute criminal proceedings against him for breach of fiduciary duty. This will result from his breach of the duty not to make improper use of position under Section 183 of the Corporations Act. Bill abused his position as the managing director of Solartec to obtain an unfair advantage in terms of buying the business. The Board can also open criminal proceedings against the Chief Financial Officer for making improper use of information contrary to Section 183. This is in respect to his use of the financial records of Aussie Solar. In addition, the Board has a right to pursue civil litigation against Bill and the other executives.

Remedies and Penalties

Under civil litigation, Solartec may have various remedies available. One of this is an account of profits for breach of fiduciary duty. Under this remedy, the fiduciaries will be stripped of their unauthorized gains. Thus, in this case, any profits that the fiduciaries have obtained from the purchase of the business will be awarded to the principal, in this case Solartec since the executives breached the fiduciary duty and obtained profits from the business. Another remedy available is an action for damages or compensation. Solartec may be awarded specified unliquidated damages for the breach of fiduciary duty by Bill and his fellow executives. The court may reward an amount after consideration of the loss that Solartec has suffered in monetary terms. The other remedy that may be applied is rescission of the contract. The contract of purchase of Aussie Solar by Bill and his fellow executives may be rescinded since the court may declare it illegal and hence unenforceable. Hence, the court may apply these various remedies in determination of this affair.