Law principles and practice Directors

Report
Directors and
Officers
Corporate Law: Law principles and practice
Who manages the company?
A company, as an artificial entity, must act through its
agents.
A company must have a director/s (one who is a
managing director).
Officers in the company perform various executive
functions.
Employees are also agents of the company.
Others contracted by the company may also carry out
commercial and administrative functions.
Corporate Law: Law principles and practice
Directors and officers
Directors of a company manage the company along with
the officers.
Directors are also officers.
The definition of a director and officer is important
because various duties and liabilities are attached.
Corporate Law: Law principles and practice
Definition of a director and officer
The definition of directors and officers is found in s 9 of
the Corporations Act 2001 (Cth).
If a party is a director or officer as defined, they are liable
for any duties imposed by common law and statute.
Directors and officers (and sometimes employees) may
suffer penalties for breach of imposed duties.
Corporate Law: Law principles and practice
Definition cont …
A director is:
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someone appointed as a director
someone appointed as an alternate director (regardless
of the name given); or
unless it can be proven otherwise, a person not
appointed who acts in the position of director and/or
whose wishes the other directors are accustomed to
acting in accordance with (shadow directors).
Corporate Law: Law principles and practice
Officers
An officer is:
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a director or secretary; or
a person who makes, or participates in making,
decisions that affect the whole, or a substantial part,
of the business of the corporation; or
a person who has the capacity to affect significantly
the corporation’s financial standing; or
a person appointed to the company, such as a receiver,
manager, administrator, liquidator etc.
Corporate Law: Law principles and practice
Other types of directors
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Alternate director: appointed to act in place of an
appointed director (Corporations Act 2001 (Cth) s
201K)
Shadow director: acts with the authority of a director
and is therefore implied to ‘be a director’
Executive and non-executive directors: executive
directors are ‘working directors’ on a salary and are
employed day to day. Non-executive directors are not
agents of the company but are members of the board
and advise and supervise company activities
Managing director: a director with superior powers as
an executive director, a CEO or President
Corporate Law: Law principles and practice
Board of directors
The different directors meet as a board several times a
year.
The board is the collective agent of the company.
The board may allow certain chief officers and advisors to
attend.
The board must comply with appropriate legal
requirements concerning meetings procedures and
decision-making, as well as their own company rules.
Corporate Law: Law principles and practice
The legal role of board members
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to be competent in understanding the business, its risks
and potential liability
to be honest and faithful as a fiduciary
to comply with appropriate business ethics
to ensure the company complies with its statutory
obligations
to comply with good corporate-governance principles
to ensure they have the appropriate skills required to
be part of the board, or seek further advice if required
to ensure the company does not trade while insolvent
Corporate Law: Law principles and practice
Board members
Board members must be aware of their potential liability.
This applies even to non-executive directors
Non-executive directors contribute to the decision making
process through their prior experience and skills.
Non-executive directors are usually paid quite
significantly in some larger companies.
Non-executive directors are supposed to supervise the
activities of the executive directors.
Corporate Law: Law principles and practice
Directors’ powers
Directors are assumed to have any of the required powers
needed to manage a company (Corporations Act 2001
(Cth) s 198A: a replaceable rule).
A managing director can be delegated superior powers by
other director (s 198C).
Directors can delegate powers to other directors (s 198D)
(though directors must be careful when doing this. See
Centro case, chapter 9).
Corporate Law: Law principles and practice
Directors’ meetings and procedures
The directors must meet as a Board of Directors to make
collective decisions (resolutions) on behalf of the
company.
Directors must comply with their company’s constitution
and corporate law when holding a meeting.
Corporate Law: Law principles and practice
Some procedures required
Administrative matters may be determined by the CEO
and passed to the employees (no meeting required)
At directors meetings, decisions are reached on a
‘majority rules’ basis. If the vote is tied, a chairman (with
a casting vote) is required.
Directors may meet to carry out resolutions of
shareholders meetings.
Reporting requirements: company secretary lodges
annual reports (approved by directors) and annual return
on behalf of the company.
Corporate Law: Law principles and practice
Board meeting procedure
Meetings must be held regularly (4 to 6 times a year).
A meeting must have a quorum (Corporations Act
2001 (Cth) s 248F).
Corporate Law: Law principles and practice
Usual procedures at the meeting
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previous minutes and their confirmation
meeting attendees and apologies for absent directors
declaration of conflicts of interests or material interests
matters arising (a log of ongoing business items)
report from the chair
report from the CEO
items for noting or for information from the board
items for discussion
items requiring a vote by the board (also referred to as
a resolution of the board)
board reflection time (usually just involves board
members at the end of the meeting)
Corporate Law: Law principles and practice
Board decisions
Board decisions are usually made by majority vote
(Corporations Act 2001 (Cth) s 248G(1)).
The chair may have casting vote (s 248G(2)).
Corporate Law: Law principles and practice
Types of decisions a board makes
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when to expand or contract the business
the company’s debt and liquidity levels, and concerns about
financial risk
the company’s borrowing levels
delays or difficulties with major projects undertaken by the
firm
new business opportunities
competitive pressures
when to seek specialist advice: e.g. senior legal advice
employee and human resources issues
litigation, including cases in which the company is plaintiff
or defendant
takeovers and guidance to shareholders
winding up the business
directors and officers’ insurance
Corporate Law: Law principles and practice
Managing the company
The director’s role includes:
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day-to-day management of the business (e.g.
employing staff, monitoring office expenses, dealing
with human resources issues and so on
longer-term strategies and planning (e.g. supply
contracts, the location of the office, the purchase of
plant and equipment, and borrowings by the company
liaising with and keeping the shareholders ‘contented’.
Corporate Law: Law principles and practice
Carrying out the company’s work
Strategy: the board
Management: CEO and senior managers
Administration: managers
Operations: employees
Corporate Law: Law principles and practice
The board and its work
Chairperson
Board member/director
Chief Executive Officer
Senior managers
Employees
Corporate Law: Law principles and practice
Appointing and remunerating directors
Must comply with legislative requirements
Appointment of directors (replaceable rules)
201A–M of the Corporations Act 2001 (Cth):
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s 201A: minimum number of directors
s 201B: who can be a director (needs to be 18 years of
age)
s 201D: consent to act as director (must be written
consent)
s 201E: special rules for appointment of public
company director (must be approved by
resolution at a general meeting)
Corporate Law: Law principles and practice
Appointment of directors cont …
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s 201F: appointment of single directors in a oneperson company (can be done by mere signing)
s 201G: a company may appoint a director
s 201H: directors may appoint other directors
s 201J: appointment of managing directors
s 201K: alternate directors
s 201L: signpost—ASIC to be notified of
appointment
s 201M: effectiveness of acts by directors
Corporate Law: Law principles and practice
The first directors are appointed on incorporation of the
company.
The constitution will usually contain details as to the
appointment of subsequent directors.
The register of directors must be regularly and accurately
updated, both:
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at the company’s registered office—with ASIC,
under ss 201L, 205A and 205B of the Corporations Act
2001 (Cth);
• To seek information under s 205E.
Corporate Law: Law principles and practice
Remuneration of directors
202A–C of the Corporations Act 2001 (Cth):
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s 202A: remuneration of directors (determined by a
general company meeting)
s 202B: members may obtain information about
directors’ remuneration (5% or 100 members can
force disclosure)
s 202C: special rule for single director/single
shareholder proprietary companies (the director can
determine their own remuneration)
Corporate Law: Law principles and practice
The company secretary
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s 204A: minimum number of secretaries (a proprietary
company does not need a secretary)
s 204B: who can be a secretary (must be 18 years of
age)
s 204C: consent to act as a secretary (must be signed
consent by secretary)
s 204D: how a secretary is appointed (ASIC must be
notified within 28 days)
s 204: effectiveness of acts by secretaries (valid even
if invalid appointment)
Corporate Law: Law principles and practice
The company secretary cont …
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s 204F: terms and conditions of office for secretaries
(determined by directors)
s 204G: signpost to consequences of disqualification
(a secretary ceases to hold office if disqualified
unless a court orders otherwise)
Corporate Law: Law principles and practice
Resignation, retirement and removal of directors
Sections 203A–F:
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s 203A: director may resign by giving written notice to
the company
s 203B: signpost to consequences of disqualification
from managing corporations
s 203C: removal by members—proprietary companies
(removal can be by ordinary resolution)
s 203D: removal by members—public companies
(requires two months’ notice and must adhere to the
company’s constitution
Corporate Law: Law principles and practice
Removal of directors cont …
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s 203E: directors of public companies cannot be
removed by other directors (only by shareholders)
• s 203F: termination of appointment of managing
director (if no longer a director)
• in proprietary companies, a director may resign (s
203A) or be removed in general meeting (s 203C)
• in public companies, a director may be removed by a
resolution in a general meeting
Corporate Law: Law principles and practice
Disqualification of directors
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s 206A: disqualified persons cannot manage
corporations
s 206B: automatic disqualification (for serious
offences or for bankruptcy)
s 206BA: extension of period of automatic
disqualification is possible by ASIC for up to 15 years
s 206C: court power of disqualification (for
contravention of civil penalty provisions)
s 206D: court power of disqualification—for
insolvency of two or more companies
Corporate Law: Law principles and practice
Disqualification cont …
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s 206E: court power of disqualification—for repeated
contraventions of Act
s 206F: ASIC’s power of disqualification (if they were
a director of two or more failed companies)
The Act provides for a director to be disqualified in two
broad categories:
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automatically (s 206B)
via court application by ASIC (s 206C–E): see
Elliot v ASIC [2004] VSCA 54, ASIC v Vizard
[2005] FCA 1037.

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