#3569 - Directors' Duties 1 Cases - Company Law

Compnay Law Supervision V – Notes

DIRECTORS’ DUTIES

To Whom Are Directors’ Duties Owed?

Coleman v Myers [1977] (New Zealand Case)

D was director of family company. D made offer to buy shares of other members of company, and invoked statutory power of compulsory purchase. C, other shareholders, brought action alleging breach of fiduciary duty owed by D to shareholders, in that D had not disclosed information relevant to true price of shares. Held:

Fact that directors’ duties are owed to company does not stop them coming to owe fiduciary duties to shareholders.

This may happen where:

1. There is agency relationship

2. There is special factual relationship giving rise to fiduciary duty

Facts

On facts

Company was small family company

Shareholders heavily depended on D for information and advice

Transaction was significant

Information relevant to true price of shares had been withheld from shareholders

Thus special facts gave rise to fiduciary duty on part of D to make full disclosure

And D had breached this duty

Section 171

Regentcrest plc v Cohen [2001]

Test of improper purposes is objective.

And not subjective

Thus test is not one of good faith

i.e. is possible for director to be acting in good faith, but for improper purposes

Bennetts v Board of Fire Commissioners of News South Wales [1967] (Australian Case)

Nominee/special interest director has overriding duty to serve interests of board on which he sits

Thus cannot act as representative of his nominator.

Hogg v Cramphorn [1967]

Directors issued around 6,000 shares for purpose of defeating a takeover of company; claimed to be doing this in best interests of employees and shareholders of company. This succeeded, but directors were sued by company for breach of duty. Held:

Test for improper purposes is objective

i.e. fact that directors though they were acting in best interests of employees/shareholders is irrelevant

Primary purpose of power to allot shares is raising of capital.

Thus use of power to block a takeover is breach of duty.

Howard Smith v Ampol Petroleum [1974] (PC)

Company was subject to rival takeover bids from two of its shareholders. One bidder had 55% of shares, but was clear that the other offer was better for company. Thus directors of company allotted $10 million of new shares to preferred bidder to give him majority. Held:

Power is exercised properly where “substantial purpose” for which power was exercised is proper.

‘Substantial purpose’: i.e. the dominant or primary purpose

On facts, issue of shares was entirely to dilute power of majority shareholder.

Thus was breach of duty.

Mills v Mills [1938] (Australian Case)

Directors voted to pay out profits of a company in form of bonus shares to ordinary shareholders (instead of dividends). As result, voting power of preference shareholders was severely diminished. C, who had preference shares, sued for breach of duty. Held:

Where directors allot shares, is impractical to look at whether power was exercised for benefit of company.

Rather test for proper purposes is one of fairness as between individual shareholders.

Section 172

Regentcrest v Cohen [2001]

Test for good faith (under pre-2006 law) is entirely subjective

However the greater the detriment caused to company, harder it will be for D to show he acted in good faith

Extrasure Travel Insurance [2003]

Test for whether director is acting in best interests of company (old law) is subjective.

Fact that director was behaving unreasonably is simply evidence towards showing he was not in good faith

Re W & M Roith Ltd [1967]

Director of a company wanted to make provision for his widow; thus entered into service agreement with company whereby she was to be granted pension upon his death. Held:

Deceased had not considered at all whether transaction was for benefit of company.

Thus director was in breach of duty.

Item Software v Fassihi [2004]

D was director of C. C was in a distribution agreement with Isograph. When C tried to renegotiate its terms with Isograph on more favourable terms, D approached Isograph with idea of establishing new company to take over distribution agreement; however at same time, D encouraged C to take aggressive stance in negotiations. Negotiations fell through, and Isograph entered new agreement with D. When C heard this, alleged D had not complied with duty to act bona fide in interests of company (pre-2006 law) by failing to disclose his misconduct to C. Held:

Fiduciary duty to act bona fide in interests of company require D to disclose his own or others’ misconduct to company.

Policy reasons support this extension of duty of loyalty:

Is economically efficient, as it means that company does not have to expend resources investigating directors’ conduct

Helps shareholders monitor activities of directors

Helps directors comply with their duty of oversight (e.g. Re Barings)

All directors’ duties are essentially extension of duty of directors not to benefit themselves at expense of corporation

Thus not unnatural to extend duty of loyalty in this way

Facts

D had breached rule against diversion of corporate opportunity.

Thus on facts, is no way D could have complied with his duty top act in best interests of company without telling C of his plans to steal the contract from them.

Section 173

Fulham Football Club [1994]

Football club had football ground on lease. In return for substantial payment, directors of club agreed not to oppose any future planning applications which owners of the ground might make. Sought to get out of contract by alleging it was unlawful fetter of their duty to act in best interests of club in future. Held:

Performance of a contract is not breach of s.173 if director exercised independent judgment when entering into the contract

Thus provided D believed contract was for benefit of company at time he entered it, cannot claim later on that contract stops him acting for benefit of company

Here, directors entered agreement which substantially benefitted company

Thus cannot be said that they improperly fettered their future discretion

Section 174

Re Barings (No.5) [1999]

Barings was a Merchant Bank. Due to activities of one rogue trader in Far East, bank collapsed. Disqualification proceedings were brought against three of its former directors...