Company Law Assignment free essay sample

Criminal Act 2001 (Cth) Code Act 1995 (Cth) Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 3 Lennards 4 Crimes Act 1914 (Cth) LAWS2301 | Take Home Assignment | Sandy Goh (20806534) PART A (ii) – actions GE can take against Ross and/or FP Action taken against FP Ross breached the clause in his contract by competing with GE while he is employed by it. He can argue that FP is a separate legal entity (s124) from him, and is not bound by the contract he entered into with GE. Ross is a hiding behind FP to avoid legal obligations as shown in Gilford Motor5. As the directing mind and will behind FP, Ross has defrauded GE by making FP compete against GE intentionally, as shown in similar cases Bestobell6 and Re Darby7. In this case, the corporate veil may be lifted under the common law and Ross will be made liable. Action taken against Ross On behalf of GE, Monica is able to impose liability on Ross for breaching his duties owed to GE as a promoter. in the exercise of powers given to them [directors] must, as I conceive, keep within the proper limits. Powers given to them for one purpose cannot be used by them for another and different purpose. To permit such proceedings on the part of directors of companies would be to sanction not the use but the abuse of their powers†. The limits on the exercise of power may be found in the articles of association. However in advance it is not possible to lay down the limits beyond which directors may never pass in exercising a particular power. Every case depends on its own facts. In Hogg v Cramphorn Ltd the subject directors believed that it would not be in the company’s best interests or its staff if there was to be a pending takeover as the change would result in the nature of the company’s trading being unsettling. As a result of this, the directors sought to frustrate the takeover by issuing to the trustees of an employee trust fund 5707 preferences shares, each carrying ten votes. These votes constituted a majority in general meeting in combination with those shares held by friendly interests. Through an interest free loan from the company’s reserve fund, the shares were paid for as well as further money advanced to the trustees to purchase additional preference shares which also came from the reserve fund. From here, a minority shareholder decided to challenge the transactions. It was held that while acting in a manner which they believed to be in the company’s best interests, the transaction was voidable as its primary purpose was to ensure control of the company by the directors and those who they could regard as their supporters and thereby discourage the takeover bid from taking place. Where there is more than one purpose, the court must try to find the dominant purpose behind a power use to determine whether the proper purpose duty has been infringed. In Howard Smith Ltd v Ampol Petroleum Ltd Millers was subject to a takeover offer by Ampol and Howard Smith made a rival offer. Ampol and its associated company, Bulkships, rejected the offer and stated that they intended to act jointly in relation to the future operation’ of Millers. The majority of Millers’ board were in favour of the Howard Smith takeover bid. And to smooth the progress of the bid they agreed to issue enough shares to Howard Smith to reduce Ampol and Bulkships to minority shareholders. Millers did at the time did need to raise some capital and Ampol sought to have the share issue set aside. It was held that in determining whether the duty had been breached, the court had to look at the substantial purpose for which [the power] is exercised, make a conclusion as to whether that purpose was proper or not. In this case it was found that the purpose was simply to reduce the majority voting power held by Ampol and Bulkships to enable a then minority of shareholders to sell their shares more advantageously. The power had therefore been improperly exercised and the share issue was set aside and the share register rectified. However in Condraulics Pty Ltd v Barry amp; Roberts Ltd it was found that the overriding purpose of the share issue was to encourage employee loyalty despite the share issue coinciding with a takeover bid. Hence, in Pine Vale Investments Ltd v McDonnell and East Ltd, the courts upheld a share rights issue to raise finance to take advantage of a genuine favourable opportunity even though this coincided with a takeover announcement. The rights issue even raised the number and value of the company’s shares and discouraged the takeover, but yet the court held that the directors should [not] be reduced to inactivity because of the pendency r that there may be a possible chance of a takeover offer. This decision clearly weakens the traditional approach to the proper purposes doctrine; however its ultimate conclusion may re-establish a close relationship with Howard Smith v Ampol. Acting bona fide in the interests of the company is not an excuse for acting for a dominant improper pur pose, especially where the directors are acting in their own self-interest as in Howard Smith v Ampol. In this case Lord Wilberforce stated â€Å" when a dispute arises whether directors of a company made a particular decision for one purpose or for another he court, is entitled to look at the situation objectively in order to estimate how critical or pressing an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme. † Where there are rival takeover bids the directors must not exercise their powers in such as way as to prevent the members obtaining the best price for their shares. In Heron International Ltd v Lord Grade the use of power was to refuse to register transfers, and in Re a Company the use of power was to provide information. However, where there are competing offers, the directors are not under a duty to recommend and assist the carrying out of the higher offer. Many cases where the question of improper use of a power arises are concerned with directors using their powers to allot shares in order to give votes to their friends and avoid a change in the control of the company. The directors’ power to allot shares is now restricted by the Company Act 2006. Although the directors’ duties when exercising powers has been in relation to the power to allot shares, the duty has been examined in other cases such as the power to borrow and give security as in Rolled Steel v British Steel, the power to make calls on partly paid shares as in Anglo-Universal Bank v Baragnon, the power to determine the terms and conditions on which shares are issued as in Alexander v Automatic Telephone, the power to call general meetings as in Pergamon Press Ltd v Maxwell and power to cause the company to enter into contracts as in Lee Panavision v Lee Lighting. S172 of the Companies Act 2006 expresses what is the central obligation of a director; s172(1) states a director of a company must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. S172(2) states where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes. S172(3) states the duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company. S172 is based on the equitable fiduciary duty which was formulated, in combination with the duty to act within powers by Lord Green MR in Re Smith and Fawcett Ltd. It was said that the directors of a company must act â€Å" bona fide in what they consider not what a court may consider is in the interests of a company, and not for any collateral purpose. † This reflects the way in which the equitable principle was applied. The court does not substitute its own view as to the merit of the decision as Lord Wilberforce said in Howard Smith v Ampol. Also in Regentcrest plc v Cohen Jonathan Parker J stated â€Å" the question is whether the director honestly believed that his act or omission was in the interests of the company no doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a hard task persuading the court but that does not detract from the subjective nature of the test. † In the case of JJ Harrison (Properties) v Harrison Chadwick LJ also stated â€Å" he powers to dispose of the company’s property, conferred upon the directors by the articles of association, must be exercised by the directors for the purposes, and in the interests, of the company. † However in Item Software v Fassihi Mr Fassihi was a sales amp; MD of Item and Item distributed software created by Isograph. Fassihi then set up his own business to take over the distribution whilst he was still a director of Item. At the same time, he advised Item to be tough in negotiations for new contract with Isograph, however he did not think about disclosing this breach. It was then put to the test whether an intelligent amp; honest person in his position would have reasonably believed that disclosure was in company’s best interests. Arden LJ stated â€Å" the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company the duty is expressed in these very general terms it focuses on principle not on the particular words which judges or the legislature have used in any particular case or context If directors of a company have acted without considering the interests of the company, their actions may be considered to have been bona fide in what they considered to be in the interests of the company, but only if it satisfies the objective test as in Chaterbridge Corporation v Lloyds Bank. In this case Pennycuick J formulated the objective test stating â€Å" the proper test must be whether an intelligent and honest man in the position of the director of the com pany concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company. If it is believed that a director of a company has acted without considering the company’s interests and there is no basis as to why the director could reasonably have seen that the action was in the company’s best interest, the court will find that the director was in breach of duty as seen in Item Software v Fassihi. S172(1) brings in the interests of the company and its members as a separate person by expressing a directors duty in terms of promoting the success of the company for the benefit of its members as a whole. In Mutual Life Insurance v Rank Organisation directors of the Rank Organisation had decided to issue new shares and part of the issue was made available to existing shareholders at a favourable price, but shareholders living in North America were excluded to save the company the high cost of complying with US and Canadian legislation concerning public offers of shares in those countries. It was held that the directors had not acted in breach of duty in preferring the interests of the company as a separate person to the interests of some of its members. However in Gaiman v National Association Megarry J observed that as a company is an artificial legal entity, it is not easy to determine what is in the best interests without paying due regard to its present and future members as a whole. Also in Paramount Communications v Time Inc Time Inc decided to go ahead with a merger with another company not allowing shareholders the chance of selling their shares to an unwelcome takeover bidder, even though the bidder was offering more than the current market price for the company’s shares. However the court accepted that it was egitimate for the directors of Time Inc to decide that it was in the company’s best interests. The court clearly rejected the idea that the directors’ duty was simply to maximise shareholder value in the short term. S172(3) provides that the duty to promote the success of the company has effect, subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or a ct in the interests of creditors of the company. In West Mercia Safetywear v Dodd the court held that a director of an insolvent company must have regard to the interests of its creditors. If directors of a company, at a time when the company is insolvent, or of doubtful solvency or on the verge of insolvency, deal with its property in a way that is prejudicial to the interests of creditors then they are in breach of their fiduciary duty to the company as in Kinsela v Russell Kinsela. However in Kuwait v National Mutual Life it was stated that ‘a director does not by reason only of his position as director owe any duty to creditors or to trustees for creditors of the company’. This was also confirmed in Yukong Line v Rendsburg Investments. It is an equitable principle that a director of a company is under an obligation to disclose a breach where he or she has acted in breach of their fiduciary duty, if disclosure is required by the equitable duty to act bona fide in what the director considers to be the interests of the company as in Item Software v Fassihi. So the duty is to disclose what the director considers, not what the court may consider is in the interest of the company to know as in Fulham Football Club. A director also has a duty to disclose breaches of duty by fellow directors, if to do so would be bona fide in what the director considers to be the interests of the company. In British Tool v Midland International four directors of a company planned to create a rival company. One of them retired and set up a new company inviting key employees of the old company to join it, while the other three directors continued in their old employment without letting the other directors know of their plans. It was held that this was a breach of their fiduciary duty and amounted to a conspiracy to harm the company by unlawful means.