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Chapter 2 - Directors’ duties and corporate governance
Proposed changes to directors’ duties and corporate governance
Business judgement rule
2.1
The Bill introduces a business judgement rule,
which provides directors with a safe harbour from personal liability in
relation to honest, informed and rational business judgements.[1] Directors will not be found to
have breached their duty of care and diligence if, when making business
decisions, they:
- acted in good faith for a proper purpose;
- did not have a material personal interest;
- informed themselves about the subject matter of the decision; and
- rationally believed the decision was in the company’s best
interests.[2]
Directors’ duty of care
2.2
The Bill redrafts the duty of care and diligence
in section 232(4) of the Law to clarify the standard of care and diligence
required of a company officer. The Bill makes clear that whether an officer has
breached that standard will be determined both by regard to the company’s
circumstances and the officer’s position and responsibilities.[3]
Conflicts of interest
2.3
Section 187 of the Bill deals with conflicts of
interest faced by directors where they are directors of two or more companies.
The Bill will permit directors who serve on wholly or partly owned subsidiaries
to take into account the interests of the holding company in certain
circumstances. The Explanatory Memorandum notes:
The proposed new provision is
designed to give directors some certainty in the performance of their
obligations as the problem of conflict of interest is potentially one that will
increase given the growing complexity of corporate groups and the limited pool
of people from which directors are drawn in Australia, resulting in many
directors of public companies taking on multiple directorships. The proposed provision
is based on S.131 (2) of the New Zealand Companies Act 1993 and gives
legislative expression to the current state of the common law in this area.[4]
2.4
The Committee is concerned with the views
expressed in the Government’s explanatory memorandum that there is a ‘limited
pool of people from which directors are drawn in Australia’.[5] The Committee is also concerned
about a concentration of directorships of Australian Companies. At a time when
the Government is promoting the apparent increasing level of share ownership in
Australia, the pool from which company directors can be chosen should be
increasing, not decreasing.
2.5
While the CLERP proposals claim to provide
certainty for directors in the performance of their obligations and apparently
give legislative expression to the common law in this area, this is an area
which the Government should carefully monitor and review if necessary.
2.6
Subject to certain exceptions, the Bill requires
directors of a proprietary company to disclose any material personal interest the
director has in a matter before the board.[6]
Currently the disclosure obligation applies to contracts, proposed contracts,
offices and property. The Bill also extends the disclosure obligation to
directors of public companies.
Statutory derivative action
2.7
The Bill introduces a statutory derivative
action that will allow shareholders and directors to commence proceedings on
behalf of a company where the company is unwilling or unable to do so. However,
such proceedings cannot be commenced without leave of the court (subsection
237(1)). The court must grant leave if the following five criteria have been
satisfied: (i) inaction by the company; (ii) the applicant is acting in good
faith; (iii) the action appears to be in the best interests of the company; (iv)
there is a serious question to be tried; and (v) the applicant give 14 days
notice of the application and reasons to the company (subsection 237(2)).
Issues raised in submissions
2.8
A number of submissions to the Committee raised
several issues in relation to the changes contained in the Bill.
2.9
The Australian Stock Exchange (ASX) is of the
view that the introduction of a statutory derivative action, without adequate
statutory safeguards, may lead to vexatious actions in the courts. To overcome
this the ASX proposed that the onus of proof for any action should rest with
the applicant. The ASX also stated that there is no provision in the Bill that
would enable a company to challenge the continuation of a statutory derivative
action if the company subsequently had reason to believe that the applicant was
no longer acting in good faith or in the best interests of the company. [7]
2.10
It was suggested to the Committee that the
business judgement rule should extend to business judgements beyond merely
“business operations”. Mr Greg Bateman, representing the Commercial Law
Association of Australia Ltd, proposed that the business judgement rule should
provide a safe harbour not only in relation to the duty of care and
diligence but also in relation to: the duty to prevent insolvent trading,
liability for mis-statements in a prospectus and liability for mis-statements
in takeover documents. [8]
The defining of “business judgement” by reference to “business operations” in
section 180(3) of the Bill would suggest that that there are some business
judgements that will not have a safe harbour.
2.11
Generally, submissions to the Committee welcomed
the reforms contained in the Bill concerning directors’ duties and corporate
governance as a means of facilitating decision-making by directors and
promoting investor protection. The Committee has considered the issues raised
and supports the introduction of the CLERP reforms, in particular the business
judgement rule and statutory derivative action, both of which will serve to
clarify and add certainty to this area of the Law.
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