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Conflicted by interests

Prof Michael A Adams

Introduction – conflicts of interest

• Overview of officers’ duties• Importance of conflicts laws• Practical examples and cases

Context of governance

• Important to understand corporate governance

• Various definitions• Board Charter

• There is a clear distinction between the concepts:

• Corporate governance• Due diligence• Compliance program

Adams’ Concepts

Officers and Directors

• Section 9 is the “Dictionary”• Officer = director or secretary of the corporation• De facto• Shadow

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Corporations Act 2001

Reasonable care

Act honestly Misuse information

Misuse position

Insider tradingInsolvent trading

Criminal offences

Liable for all

“Adams officers’ overlap diagram”

Harris, Hargovan & Adams, Australian Corporate Law LexisNexis 2010

SBSA v Clark (1996)

General Defences

• There are not many defences• 1993 BJR defence s 180(2)• USA has “safe harbour rule”• Common law

Focus on conflicts

• Fiduciary duty creates legal duties, which at its heart state:

– “no conflict rule”– “no profit rule”

Conflicts law

• All officers and directors are fiduciaries• Impact of Grand Enterprises v Aurium

Resources (2009)

Conflicts law

Duty to avoid conflicts of interest– Aberdeen Railway Co v Blaikie Bros (1854)

• Tests for establishing conflicts–Phipps v Boardman (1967)– Bell Group Ltd (in liq) v Westpac (2008)

Rule against conflicts

Diversion of business opportunities & misappropriation of company property

• Green v Bestobell Industries Pty Ltd (1982)

Some potential protections:–Peso Silver Mines v Cropper (1966)–Streeter v Western Areas Exploration Ltd (2011)

• Regal Hastings Ltd v Gulliver (1967)

Secret profit concept

• The general rule is against any “secret profits”– Regal Hastings Ltd v Gulliver (1967 HL)

– Groeneveld Australia PL v Wouter Nolten (2010)

Statutory overlap

• The equitable fiduciary duty overlaps with statutory provisions in sections 182 &183– ASIC v Vizard (2005)

Disclosure

• “The best disinfectant is day-light”– full and frank disclosure is critical to avoid conflicts

• Both equity and section 191 provide protection

Conflict defences

• Full and frank disclosure • Apply for court relief under section 1317S• Members consent or Ratification

Conclusion

• All company officers owe legal duties• Good corporate governance helps• Conflicts of interest get resolved by disclosure