Law2034 Company Law Lecture 7 PDF

LAW2034 COMPANY LAW LECTURE 7 COMPANY DIRECTORS & OTHER OFFICERS 1  RECAP 1 SHARE 3 CLASSESS OF SHARES CAPITAL 2 SHARES 4 ALLOTME NT OF SHARES  LECTURE OBJECTIVES Definition of Director DD Dutie...

LAW2034 COMPANY LAW LECTURE 7 COMPANY DIRECTORS & OTHER OFFICERS 1  RECAP 1 SHARE 3 CLASSESS OF SHARES CAPITAL 2 SHARES 4 ALLOTME NT OF SHARES  LECTURE OBJECTIVES Definition of Director DD Duties and Responsibilities Consequences For Breach Business Judgement Rules SUNWAY UNIVERSITY  LECTURE OBJECTIVES Understand the role, duties, and responsibilities of a director in a corporate governance structure. Identify the responsibilities of directors in decision-making processes, including fidicuary duty and best interest of the company. Analyze the legal and financial consequences directors may face for breaching their fiduciary duties. Examine the Business Judgment Rule and how it protects directors from liability when making decisions in the best interest of the company, within the bounds of good faith and due care.  OFFICERS OF A COMPANY (S.2(1) CA 2016) Director Secretary Employee Receiver & Manager Liquidator  DEFINITION OF DIRECTOR (S.2(1) CA 2016) Person occupying position of director, by whatever name called Person in accordance with whose directions/instructions majority of directors are accustomed to act  BOARD OF DIRECTORS Manages company's business (S.211(1) CA 2016) Powers necessary for managing, directing & supervising management of company's business and affairs (S.211(2) CA 2016)  APPOINTMENT & RESIGNATION OF DIRECTORS (S.196 CA 2016) Min. 1 director for private co, min. 2 for public co Must be natural person, at least 18 years old Director may not resign if results in falling below minimum number No maximum age limit  DISQUALIFICATION OF DIRECTORS (S.198 CA 2016) Disqualified if: Undischarged bankrupt Convicted of offences involving fraud, dishonesty, company management Convicted under S.213, 217, 218, 228, 539 CA 2016  REMOVAL OF DIRECTORS Private Co: Ordinary resolution, subject to constitution (S.206(1)(a) CA 2016) Public Co: Ordinary resolution at general meeting, special notice, fill vacancy at same meeting (S.206(1)(b),(2)-(5) CA 2016) Office vacated upon removal  COMPENSATION FOR LOSS OF OFFICE (S.227 CA 2016) No compensation required unless provided in service contract approved by shareholders (S.227(1),(5)(d)) CA 2016 Alternatively, past remuneration as pension (max 3 years) Exception for payments agreed pre-appointment (S.227(5)(e))CA 2016  OVERVIEW OF DIRECTORS DUTIES In addition to Common Law Duties, there are statutory duties. Some duties overlaps The Malaysian Courts stated that the statutory duties embody the fiduciary duties under common law. The CA 2016 also contains provisions that impose on directors other obligations not required under common law. There also obligations imposed under other legislations such as Capital Markets and Services Act CMSA 2007 Directors of listed co may also carry further obligations under Bursa Malaysia Listing Requirement (BMLR) Source : Book Malaysia Company Law: Principles and Practices 2nd Edition  DUTIES AND RESPONSIBILITIES (S.213 CA 2016) Exercise Proper purpose & Good Faith : S 213(1) CA 2016 : A director of a company shall at all times exercise powers in accordance with this Act for a proper purpose and in good faith in the best interest of the company. Director must exercise powers for proper purpose (according to the actual purpose of the company) Director must act in good faith (no bad intention or ill plans) and best interest of company There is breach of duty of good faith when director is aware what what is done is not in the best interest of the company. There is a breach of duty when directors deliberately or intentionally act in disregard of the companys interest. Exercise Reasonable care, skill and diligence : S 213(2) (a) & (b) CA 2016 The knowledge, skill, and experience which may reasonably be expected by a director.  DUTIES AND RESPONSIBILITIES (S.213 CA 2016) Kawin Industrial v Tay Tiong Song - Directors sued for fraudulent trading - Directors bought machines from company & sold them, keeping proceeds for themselves -Liable for breach of fiduciary duty for authorising the acquisition of machineries and payment of money owning to themselves. -Breach of duty as not acting in company's best interest -The court was of the view that it was “a mere ploy to deflect the real intention of the whole exercise which is calculated to benefit the defendant personally”.  DUTY OF CARE (S.213(2) CA 2016) OBJECTIVE DUTY OF CARE SUBJECTIVE DUTY OF CARE DANIELS V ANDERSON (1995) S.213(2)(B) CA 2016 COMPANY MADE FX LOSSES DUE HIGHER STANDARD BASED ON TO CEO & CHAIR'S FAILURE TO DIRECTOR'S ACTUAL KNOWLEDGE, MONITOR SKILL, EXPERIENCE EXPERIENCED BUSINESSMEN CODIFIES RE CITY EQUITABLE DIRECTORS EXPECTED TO FIRE INSURANCE UNDERSTAND COMPANY'S SUBJECTIVE STANDARD - BUSINESS & RISKS ADDITIONAL KNOWLEDGE, SKILL & IGNORANCE NO EXCUSE EXPERIENCE DIRECTOR HAS OBJECTIVE STANDARD - KNOWLEDGE, SKILL AND EXPERIENCE REASONABLY EXPECTED  TEST FOR BREACH OF DUTY Objective + subjective elements (dual test): Charterbridge Corporation v Lloyds Bank , Pioneer Haven v Ho Hup Construction , Petra Perdana v Tengku Ibrahim Petra Would an intelligent and honest person in director's position reasonably believe the action was in company's interests? Tan Sri Dato' Seri Dr. Mohd. Nordin Tan & Ors v. Sri Hartamas Development Sdn Bhd & Anor" 4 MLJ 1 In this landmark decision, the Federal Court held that the correct test for determining whether a director has breached their duty is a combination. Subjective Test: This assesses the director's state of mind — that is, whether the director acted in good faith and with the belief that their actions were in the best interests of the company. Objective Test: This involves an objective review of the director's actions, considering whether a reasonable director, in the same situation, would have made the same decision, using the same degree of care, diligence, and skill expected of a director in the circumstances. The Court emphasized that the subjective test is important in understanding the director’s intention and mindset, but this must be considered in light of the objective test, which applies a standard of reasonableness in evaluating whether the director's actions were appropriate, given their role and the circumstances. The subjective test assesses the director's state of mind, while the objective test is an objective review of the director's assessment.  RELIANCE ON INFORMATION/ADVICE (S.215 CA 2016) Director may rely on information from employees, professionals, experts and board committees Reliance must be in good faith Director must independently assess the information/advice  DISCLOSURE OF INTEREST IN CONTRACTS (S.221 CA 2016) Director must disclose nature of interest in any contract/proposed contract As soon as practicable after relevant facts come to director's knowledge At board meeting or by written notice General notice of interest in other entities permitted Contract voidable at company's option if no disclosure (S.221(10)) CA 2016  DISCLOSURE AT BOARD MEETINGS (S.221(6)-(8) CA 2016) Disclosure must be recorded in minutes Must disclose nature, character and extent of interest First board meeting after becoming interested or after becoming director  EXCEPTIONS TO DISCLOSURE REQUIREMENT (S.221(2),(3) CA 2016) No requirement to disclose if: Interest immaterial Contract is for company benefit and director's interest is only as shareholder, not otherwise Company is a wholly-owned subsidiary and contract with holding company Public-listed company and contract with another public-listed company  INTERESTED DIRECTOR MUST NOT PARTICIPATE OR VOTE (S.222 CA 2016) A director with an interest cannot participate in discussions or voting. Presence is necessary to meet the quorum. Breach renders transaction voidable at companys option This rule does not extend to private companies unless they are a subsidiary of a public company.  D I R E C T O R I G N I NG T O R ES E T A K b r ea c h of duty Usually OPPORT c ons t it utes aN U I T p Y lic itly rejects any ex omp s v TAKING Unless the c P eso Si lv e r M in e tu n it y CORPORATE the oppor ]) p er [ 1 96 6 a b so lve Crop il y OPPORTUNITI Resigning d o e s n o t ea s COMPETIN Di ES o n e o f l ia b ility G WITH rectors should not seize opportunities CyOcoM Ma nsPA titutN e aY meant for the breach of duty, but company NO not an absolute Key Factors in Guth v prohibition. Loft : May serve in a 1. Position in company LI C T competing company C O N F 2. Opportunity related to if there is no misuse company's business of confidential 3. Company's information (Bell v RULE expectancy/interest in Lever Bros , opportunity Justification: challenging to act London v 4. Fairness - whether impartially when there is a Mashonaland ). company unjustly conflict between the company's However, not allowed deprived of interests and personal to provide active opportunity interests. assistance to a Boardman v Phipps , competitor, such as soliciting customers actual harm to the company is (Avel Consultants v not a requirement.  F I D E N T I A L O F C O N MISUS TION (S.218(1)e(Bo) f E INFOibRitM A m16)r o p er us i onC Aof 2i0 p g a in Pr o h t i o n to n y s rm a info co m p a t hers s e lf/o DIRECTORS a dv a n t a ge fo r t o tr a d e s ec r ets, d CANNOT Not li m it e a ll c o n fidential MAKE co v er s n ion MISUSE OF SECRET informatio r m a t It is PR necessIT Unnece s sa r y to p r ov e in fo COMPANY OF arSy to y o f c o m p any FUNDS report any profits is propert earned through one's Directors are position to the accountable for company. This obligation NO mixing company funds with personal P R OF I T remains even if the funds. company could not Utilizing company have gained the assets for personal RULE benefit (Regal gain constitutes a (Hastings) v Gulliver breach of duty ). (Choudhury v Sime This principle Darby ). Not a valid defense extends to bribes and commissions to claim that the (Mahesan v Malay company benefited in the long run Govt Officers' Coop (Guinness v ). Saunders ).  POSITION OF EX- DIRECTORS Even after directorship ends, fiduciary duties may continue. Particularly in cases involving the misuse of confidential information acquired during the director's tenure (Cranleigh v Bryant , Faccenda Chicken v Fowler ).  CONSEQUENCES OF BREACH OF DUTY Voidable contracts (S.221(10), 222(3) CA 2016) Contracts entered into by directors may be voidable if the director fails to disclose personal interests or acts improperly. Damages/compensation (Cullen Investments v Mide ) Compensation is awarded for losses due to breach of contract, aiming to restore the party to the position they would have been in. Account of profits (Regal (Hastings) v Gulliver) Directors must give up any profits made from actions that breach fiduciary duties, even if there is no harm to the company. Rescission of transactions (Guinness v Saunders) A contract can be rescinded if there was misrepresentation or other significant wrongdoing, returning both parties to their original positions. Summary dismissal of director (Boston Deep Sea v Ansell ) Directors can be immediately terminated without notice or payment for serious misconduct that breaches the trust.  CRIMINAL SANCTIONS FOR BREACH OF DUTY Improper use of position/property/information (S.218 CA 2016) Failure to disclose interest in contracts (S.221(12) CA 2016) Interested director participating in decision (S.222(4) CA 2016) Fine up to RM3 million and/or imprisonment up to 5 years  RELIEF FROM LIABILITY (S.541 CA 2016) The court may relieve a director from liability if: (1) Acted honestly and reasonably (2) Ought fairly to be excused Discretionary and depends on all circumstances.  RATIFICATION OF BREACHES (S.214(1) CA 2016) Members can ratify certain breaches by directors However, unable to nullify the company's rights. This authority is void if it includes the misappropriation of company assets (Cook v Deeks ).  TO WHOM ARE DUTIES OWED? Generally to company as a whole, not individual shareholders But interests of company = collective interests of shareholders (Greenhalgh v Ardene Cinemas ) If company insolvent/nearing insolvency, interests of creditors become relevant (Nicholson v Permakraft )  BUSINESS JUDGMENT RULE (S.214 CA 2016) A business judgment is defined as any decision to take action on a matter relevant to the company's business. Section 214(1) of the Companies Act 2016 indicates that a director has a duty of care to the company when making a business judgment. Principle of corporate governance that offers protection to directors, safeguarding them from personal liability for business decisions that may not turn out well, provided they meet specific criteria. Protects directors from hindsight bias in assessing business decisions  BUSINESS JUDGMENT RULE (S.214 CA 2016) Based on all Principles of Corporate Governance 4 criteria: 1. Informed decision 2. Good faith 3. No personal interest 4. Rational belief decision is in company's best interests  BUSINESS JUDGMENT RULE (S.214 CA 2016) Key Objectives of Section 214 Protect Directors from Hindsight Bias: The rule acknowledges that business decisions often involve uncertainty and risk. Directors should not be judged based on the outcomes of their decisions, particularly when those decisions were made in good faith and with reasonable care. Promote Sound Decision-Making: The BJR encourages directors to take calculated risks and make decisions in the best interests of the company, without fearing that they will be held personally liable for outcomes outside their control. Ensure Accountability with Safeguards: While it protects directors, it also ensures that directors cannot escape liability if they are found to have acted improperly, dishonestly, or with personal gain in mind.  FRAUDULENT & WRONGFUL TRADING (S.539-540 CA 2016) If a business carried on to defraud creditors: Individuals knowingly involved are personally liable for company debts without limit & penalty of 10 years in prison or a fine of RM1 million. Wrongful trading (Section 539 CA 2016) involves failing to prevent insolvent trading. A defense is available if steps were taken to minimize losses.  NOMINEE DIRECTORS & SHADOW DIRECTORS Nominee director is individual who acts in the capacity of a director on behalf or upon instuctions of another person (the nominator/appointer). Should take into account the nominator/ appointer's interests but must prioritize the company's interests (Raffles Hotel v Rayner ). Shadow director is individual whose directions or instructions the directors are used to following. Subject to the same duties as de jure directors (Hydrodan v Hydrox , Chameleon Mining ).  INSURANCE & INDEMNITIES (S.288-289 CA 2016) Company has the ability to indemnify or insure directors for liabilities accrued in official capacity. However, protection does not extend to criminal fines, regulatory penalties, or deliberate misconduct. Indemnification is not permitted for liabilities towards the company or any associated entities.  LIMITATION OF ACTIONS (S.6 LIMITATION ACT 1953) The limitation period is 6 years from when the cause of action arises. Exception for fraudulent breaches of trust with no limitation period (S.22 LA 1953). Time begins only when the fraud or concealment is uncovered.  SUMMAR Y CA 2016 codifies key directors' duties, in addition to common law duties Strict disclosure requirements and no-conflict rule Significant civil and criminal consequences for breach Business judgment rule offers some protection for good faith decisions Essential for directors to understand and comply with their duties Thank You