Fiduciary relationship between directors and the company

Fiduciary Duties of Director of a Company | Insights. | PocketLawyer

fiduciary relationship between directors and the company

There has to be some "special factual relationship" over and above the usual relationship of a director with the company's shareholders. It is not. The fiduciary duty of obedience recognizes that officers and directors have different responsibilities in a corporation. To fulfill this duty, officers and directors must. Fiduciary duties place a stricter standard of behaviour on director of a A fiduciary duty is the highest standard of care expected from a person.

This article will briefly canvas the position of fiduciary obligations in current law and, in particular, their role in the director-company relationship, before turning to the broader argument as to the particular impact of the High Court decision in Breen v Williams.

These cases appear to indicate an expansion of the accepted proscriptive fiduciary obligations by establishing a positive obligation on directors to disclose information in certain circumstances. There is no question that such a positive obligation can be found within the Corporations Act: Further, there is no debate that disclosure on the whole can be a mechanism for effective corporate governance.

As yet, there is no universally accepted definition of which relationship will attract fiduciary obligations, [14] nor a universally accepted test for determining when a fiduciary obligation will attach to a relationship.

Finn also cautions that being fiduciary for one obligation is not ipso facto fiduciary for all, or potentially any, other obligations, [22] and that the finding of a fiduciary relationship only marks the beginning of the enquiry. The remedies for a breach of a fiduciary obligation include the traditional equitable remedies of injunction, constructive trust, account of profits, rescission, tracing and equitable compensation.

Although the bedrock of two negative principles is generally accepted, there is a great deal of debate as to whether fiduciary obligations impose proscriptive negative duties or prescriptive positive duties. Barnes v Addy permits liability for a breach of trust to be extended to those who either knowingly receive trust property or knowingly assist in a breach of trust.

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B The Director as Fiduciary The current position regarding the fiduciary obligation owed by directors to the corporation flows from the historical development of the corporate form. The precursor to the modern company was the joint stock company, which was legally a partnership. The stockholders were status fiduciaries to each other under either of two traditional analyses: Upon incorporation, a new legal person entered the relationship — the company.

This transformation shifted contractual and vicarious liability to the new corporate entity, granting the shareholders limited liability in companies of that form, with the company now contracting as principal and assuming responsibility for the torts of its employees. It also erased the fiduciary obligations that the former stockholders had owed to each other upon their conversion to statutory investors of equity capital in the business of the corporation.

fiduciary relationship between directors and the company

Consequently there is still a fiduciary obligation owed by those who act on behalf of another. All that has changed is the identity of the party to whom those obligations are owed. The management of the company is typically vested in a board of directors.

Strict application [of fiduciary obligations] against directors and senior management officials is simply recognition of the degree of control which their positions give them in corporate operations, a control which rises above day-to-day accountability to owning shareholders and which comes under some scrutiny only at annual general or at special meetings.

The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.

Ultimately, it is recognised at law in Australia that directors are within the accepted nominate categories in which fiduciary obligations are owed. The Court held that, as part of the fiduciary duties owed by directors to the company and its members [62] in relation to proposals to be considered in general meeting, there is a fiduciary duty to provide such material information as will fully and fairly inform members of what is to be considered at the meeting.

The court in Fraser v NRMA then finds [a] duty to make disclosure of relevant information arises as part of the fiduciary duties of the directors to the company and its members in relation to proposals to be considered in general meeting The fiduciary duty is a duty to provide such material information as will fully and fairly inform members of what is to be considered at the meeting and for which their proxy may be sought.

fiduciary relationship between directors and the company

The case concerns a circular published to convene a meeting of the shareholders at which resolutions would be proposed to alter the articles of association, authorising advances to the directors and increasing the remuneration of the directors.

It included proxy forms drawn in favour of two of the directors. The plaintiffs alleged that the directors sought to indemnify themselves against, and obtain release from, breaches of trust which they had committed.

What is FIDUCIARY? FIDUCIARY meaning - FIDUCIARY definition - How to pronounce FIDUCIARY

Instead, Kekewich J in Chancery holds that the application of the doctrine in Foss v Harbottle to joint stock companies involves as a necessary corollary the proposition that the vote of the majority at a general meeting, as it binds both dissentient and absent shareholders, must be a vote given with the utmost fairness — that not only must the matter be fairly put before the meeting, but the meeting itself must be conducted in the fairest possible manner.

This judgment, on appeal from Chancery, concerns whether it is proper for the company to pay the expenses of printing, posting and stamping a circular and proxies sent out by the directors prior to the half-yearly general meetings.

The Court of Appeal discusses the duty of the directors to inform the shareholders of the facts, their policy, and the reasons why they consider that this policy should be supported by the shareholders in a general meeting, and holds that it is proper that the cost of distributing this material be borne by the company.

It concerns an extraordinary general meeting convened in a parent company to ratify the alteration of articles of association of a subsidiary company which had occurred some six years earlier. The alterations increased the remuneration of the directors and gave them a percentage of the net profits. The meeting would also authorise the directors to retain the profits received, and to alter the articles of the parent company to allow the directors to receive remuneration from subsidiary companies without being accountable, and to exercise voting powers in those companies as they saw fit.

The very substantial amount of remuneration received by the directors is not disclosed to the shareholders in the notice of meeting, the circular accompanying the notice, nor when the chairman addresses the issue at the meeting itself. The Court of Appeal holds that there is a requirement for full and frank disclosure to the shareholders of the facts upon which they are asked to vote, but does not find that this flowed from a fiduciary obligation.

Dentons - Do directors owe fiduciary duties to shareholders?

Here, the Privy Council on appeal from the Court of Appeal in British Columbia, advises that resolutions to consent to buying out the shares of the directors and releasing them from liability for any claims are ineffective due to the absence of proper notice putting each shareholder in a position to judge whether or not to consent.

The Court in Goldex then declares that such an act is also a breach of duty to other shareholders. If the directors of a company choose, or are compelled by statute, to send information to shareholders, those shareholders have a right to expect that the information sent to them is fairly presented, reasonably accurate, and not misleading.

A fiduciary for one obligation is not ipso facto a fiduciary for all, or potentially any, other obligations which are owed. The principle that the majority governs in corporate affairs is fundamental to corporation law, but its corollary is also important — that the majority must act fairly and honestly.

fiduciary relationship between directors and the company

Fairness is the touchstone of equitable justice, and when the test of fairness is not met, the equitable jurisdiction of the Court can be invoked to prevent or remedy the injustice which misrepresentation or other dishonesty has caused.

What is meant by acting in the best interests of the company? Directors must act in good faith in what they consider not what the court considers is the best interests of the company. When attempting to determine whether a director has acted in breach of his duty to act in the best interests of the company, the actual subjective motivation of the director in question needs to be investigated.

It has been held that it is not necessary to show conscious dishonesty. Similarly, if directors have put their own interests or those of some third party even if this party is a subsidiary of the company before those of the company there may be a breach of the duty.

What is meant by acting within powers? Their liability in respect of any breach does not require any element of fraudulent intent. Can a company try to prevent a director from acting outside his powers by inserting restrictions in the memorandum and articles of association? In accordance with section 33A of the Companies Law, any director of a company is deemed, as regards third parties, to be able to bind the company notwithstanding any limitation to his authority in the memorandum and articles of association of the company.

This deemed authority is not applicable in situations where the specific action of the director is beyond his capacity as provided by law. However, a director who acts outside the scope of his powers as stated in the memorandum and articles of association may be liable to the company for breach of his duty to act within his powers.

What is meant by exercising powers only for the purposes for which they are conferred? A director must exercise his powers for the particular purpose for which they are conferred and not for improper or collateral purposes even if he acts in what he honestly believes are the best interests of the company. The test as to whether a purpose is proper is an objective test, meaning that if a court concludes that a power was exercised for an improper purpose, a director will be in breach of the duty notwithstanding the fact that he genuinely even reasonably believed that he was exercising the power for a proper purpose.

A court is unlikely to interfere with the exercise by the directors of discretionary powers unless it is proved that they have acted arbitrarily and capriciously or as noted earlier, for an improper purpose.

As an example, but not limited to, a court would be inclined to conclude that a power has been exercised for an improper purpose if it has been exercised in such a way as to upset the constitutional balance between the shareholders and the directors. This means that a director will be at risk of breaching the duty if he takes a decision which, either according to general principles, or in the context of the particular internal arrangements of his company, should have been taken by the shareholders.

What is meant by a director not placing himself in a position of conflict? A director must not put himself in a position which could give rise to an actual or potential conflict between a personal interest and his duty of loyalty to the company.

University of New South Wales Law Journal

For example, if a director were to agree through a third party to sell to the company an interest in a property, whilst all the time concealing his interest, he would be in breach of his fiduciary duty. Can a situation of a conflict of interest be allowed to exist? In addition to the foregoing, the articles of association of a company can provide that a director shall not be prohibited from contracting with the company merely because of his tenure and that any such contract shall not be liable to be voided.

In such a situation, any director so contracting or being so interested shall not be liable to account to the company for any profit realized by any such contract by reason of the director holding that office or generally of the fiduciary relationship. In some instances, the articles may require that the proposed transaction is approved by the shareholders in general meeting.

The same may apply in cases where the director becomes interested in a contract or arrangement at a later stage. Then, in that case the director has a duty to declare it at the first opportunity after the director assumes that interest. Why does a director have a duty not to make secret profits?

fiduciary relationship between directors and the company

A director is in a position of trust and confidence and therefore he is not allowed to take a personal profit from any opportunities that stem from the directorship, even if the director is acting honestly and for the good of the company. Any profit accruing to the director in such a case must be returned to the company.

By way of example, a director must refund any profit received for a contract that has arisen as a result of his position as a director regardless of whether the company itself benefited from the opportunity.

fiduciary relationship between directors and the company

Directors, because of the nature of their relationship with the company, should act as trustees of its money and property which is in their hands or under their control. Do directors have an obligation to provide information to the shareholders? Directors owe a duty to provide the shareholders with sufficient information in order to enable them to be in a position to reach informed decisions with respect to any proposals to be put to them at a general meeting of the company.

What level of care and skill should one expect from a director? A director of a company must exercise reasonable care, skill and diligence.