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Corporate governance exercise Essay

Various conduct by Bernadette and Charles raise concerns of breaches of directors’ duties on their part. The conduct in issue essentially include the information disseminated by Bernadette and Charles to prospective investors of Dextrous Investments Pty Ltd (“DIL”), the sale of shares in Indonesian electricity companies held by Acme Energy Limited (“Acme”), Bernadette’s unilateral undertaking of issuing Acme’s shares to DIL to cover DIL’s loss in the sale, and the purchase and sale agreement prepared and signed by Bernadette and Charles.

Roles As Bernadette is a director of Acme,1 she owes general law and statutory duties to Acme. Charles, on the other hand, is not a director under the statutory definition. Nevertheless, his position as the Deputy Chief Financial Officer (“DCFO”) of Acme indicates that he, being part of Acme’s senior management, has the capacity to affect Acme’s financial standing, or participates in making decisions that affect the whole or a substantial part of the business of Acme.

Accordingly, Charles is an officer of Acme and therefore he also owe duties to the company. 2 Issue One: Common law and Statutory duty of care, skill and diligence (S 180 (1)) Common law and statutory duty of care are equivalent,3 except where the

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statutory duty applies to both directors and other officers of the company. 4 Under common law, there is no uniform standard of care but the minimum requirement of care is what a reasonable person, being objectively ascertained, in the director’s position in particular company would exercise.

5 Considerations should also be awarded to factors such as the specific tasks delegated and the ways in which the work is actually distributed within the company, as well as the particular director’s experience and skills. 6 Also, a slightly higher standard of care might be required for her executive director as compared to non-executive directors. 7 Accordingly, we should firstly acknowledge Bernadette’s role in Acme as the Chief Financial Officer (“CFO”) gives her executive powers to the operations of Acme. In the present case, Bernadette sold shares in the loss-making Indonesian businesses held by Acme to DIL at a profit of $60 million.

This transaction saves Acme’s need to to report a loss on the Indonesian investments by boosting its non-recurring revenue in this reporting period, which ostensibly appears to be completed with reasonable skill and care. In doing so, however, Bernadette has probably violated the prohibition on market manipulation for her control in Acme’s share price by artificial means. 8 A reasonable director in Bernadette’s position should be vigilant of this prohibition and therefore should have discouraged this transaction, or at least should have sought advice from Acme’s legal department or external lawyers.

Also, Bernadette should have informed the board about this important transaction to avoid potential breach of regulations. In addition, Bernadette via an email to Charles unilaterally provided a guarantee to DIL to cover their losses incurred in the sale by issuing Acme’s shares without consideration. As this dealing appears to be unreasonable, Bernadette should have disclosed her decision to Acme’s board of directors or in shareholders’ meeting and seek for approval. In failing to do so Bernadette’s conduct appears to be negligent.

Further, the single page purchase and sale agreement was prepared by Bernadette and Charles without being reviewed by any legal professionals. The agreement only briefly narrates who the parties are, which seems to be under-prepared for a $200 million sale. As no facts suggest that Bernadette or Charles had had any professional legal training, a reasonable director in Bernadette’s position should have sought advice from lawyers in the preparation of this agreement. Again in failing to do so Bernadette appears to have acted negligently.

As a result, Bernadette has failed to satisfy the requisite standard of care. Supported by her improper use of her position in Acme (discussed below),9 she has breached her common law and statutory duty of skill, care and diligence. However, the statutory business judgment rule might apply as a defence to both common law and statutory duty of care and diligence if certain conditions are satisfied. 10 Regarding Bernadette’s involvement in the sale to DIL consists of a material personal interest, being the entitlement to the management fee from DIL.

Therefore her case fails to satisfy s180(2)(b), and accordingly it provides no defence for Bernadette for her negligent conduct. On the other hand, Charles has acted for DIL under these facts and hence there are no information suggesting that he has breached his duty of care owed to Acme. Issue Two: Common Law and Statutory duty to act in good faith in the best interests of the company (S 181(1)(a)) This duty applies to both Bernadette and Charles.

11 This duty requires them to act in the best interest of Acme, being the interests of the shareholders as a ‘general body’12 on an objective basis. 13 It may also require disclosure of information material to decision being made by the company and non-participation in decision-making. 14 In the present case, the sale and the issue of shares have resulted in saving Acme’s to report a loss on their Indonesian investments, which will increase the likelihood of minimizing the negative impact of reported losses on its share price.

This appears to be in Acme’s best interest. However, the personal gain of $2 million has attracted the issue of good faith. The management fee can explain the underlying motive of the sale and the issue of shares as using Acme as a tool to obtain personal gain dishonestly. 15 In fact, as Bernadette and Charles already owed Acme a duty to ensure Acme sold the Indonesian companies at the highest possible price,16 from Acme’s perspective Bernadette should not be concerned about DIL’s losses and therefore should not have promised issue shares to DIL.

The email unveils that Bernadette intended to honour the promises she previously made to DIL’s investors and by that to ensure she would be entitled to significant management fees. Moreover, their breach of duty becomes more probable if the issue of shares results in dilution of the rights of Acme’s existing shareholders. Further, as the sale amounts to market manipulation,17 such finding supports the B’s failure to act bona fide in the interests of Acme and to act honestly.

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