Directors' Conflicts of Interest - Dominique Hogan-Doran SC dhdsc.com.au @DHoganDoranSC - Dominique Hogan ...
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Directors’ Conflicts of Interest
Dominique Hogan-Doran SC
dhdsc.com.au @DHoganDoranSC
Women on Boards Directors’ Circle– 14 March 2017About the presenter
Dominique Hogan-Doran SC specialises in commercial, corporate and financial services law and regulation.
She maintains chambers in Sydney, Adelaide & Canberra and has appeared in many of Australia’s most high
profile public inquiries, related disputes and enforcement action.
Recognised in Doyle's Guide to the Australian Legal Profession 2016 as a Recommended Leading
Commercial Litigation & Dispute Resolution Senior Counsel, Dominique received the Barrister of the Year
Award in the Lawyers Weekly Australian Law Awards 2016.
Dominique is a trustee director of an industry superannuation fund with $2.2 billion FUM, with
appointments to its Audit & Risk, Investment, and Insurance & Claims committees. She is also a qualified
arbitrator and mediator, with appointments to the Arbitration Panels for the National Broadband Network
and for the Essential Services Commission of South Australia for determination of wholesale access
disputes.
Prior to the Bar, Dominique was a lawyer with Mallesons Stephen Jacques and Research Director to the
Chief Justice of New South Wales, the Hon. Murray Gleeson AC. She is an honours graduate in law from the
University of Sydney and the University of Oxford, where she was the Sir Robert Menzies Memorial Scholar.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 2Expectation Gap CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 3
“The essence of a director’s role is to ensure risk and legal
exposure is identified and managed and to monitor the
effectiveness of the procedures put in place to deal with
them. Complementary to this is making sure the
organisation’s hard won reputation is maintained.
The board sets the policies about how the organisation will
AICD Course operate in its particular legal environment, communicates
those policies, makes certain they filter down through the
2013/2014 organisation and monitors how compliance systems are
implemented and reassessed regularly.
Ultimately, an organisation’s directors set the tone for all staff.
Their commitment and visible involvement is the most
important single factor in encouraging a corporate culture
and commitment to minimising risk and compliance with
laws.
Directors must lead, support and encourage the appropriate
culture in regard to the legal environment for the
organisation.”
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 4Addressing the following questions with intellectual honesty
will satisfy the duties of care, skill, diligence and good faith:
Director 1. Is there any conflict?
questions 2. Do I have all the facts to enable me to make a decision?
Mervyn King
3. Is this a rational decision based on all the facts?
4. Is the decision in the best interests of the company?
5. Is the communication to stakeholders transparent?
6. Is the organisation acting in a socially responsible way?
7. Am I a good steward of the organisation’s assets?
8. Would the board be embarrassed if its decision and the
process employed in arriving at its decision appeared on
the front page of a national newspaper?
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 5Serious breaches where these indicate:
◦ poor corporate culture
ASIC ◦ poor governance/management systems that result in
the market not being properly informed [new]
Enforcement ◦ poor listing standards, especially of emerging markets
Priorities issuers [new]
◦ misuse of cross-border services and transactions;
REP513
◦ failure by corporations to respond appropriately to
8 March 2017 the threat of malicious cyber activity
◦ misalignment between company disclosures, product
design, and investor understanding and expectations
◦ rogue insolvency practitioners [new] and others who
facilitate serious illegal ‘phoenix’ behaviour and
improper transactions in the face of insolvency.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 6Sources of Law
The duty to avoid conflicts of interest has three overlapping sources:
• Statute
• Common law
• Equity
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 7Statute
• Corporations Act 2001 (Cth) sections 191-6, Ch 2E, sections
182-3
• Superannuation Industry (Supervision) Act 1993 (Cth)
Sources of Duty sections 52-52A for registrable superannuation entities
• Australian Charities and Not-for-profits Commission
Regulation 2013 (Cth) reg 45.25
• Strata Schemes Management Act 2015 (NSW) Schedule 2,
section 18
• Strata or Community Scheme Managing Agent, Rules of
Conduct, rule 11
• Associations Incorporation Act 2009 (NSW) section 31
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 8Common law
• Company Constitution containing Articles of Association
• Duties under contract law
Sources of Duty Equity
• Fiduciary duty arising out of a relationship of trust and
confidence
• Director and company is established category of fiduciary
relationship
• Arises where one party undertakes to act in the interests of
another party rather than their own: Hospital Products Ltd v
United States Surgical Corp (1984) 156 CLR 41
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 9Three “Rules”
• “No conflicts” rule – director must not have personal interest or inconstant engagement
that is inconsistent with best interests of entity
• “No profit” rule – director must not misuse position to obtain advantage for themselves or
third party without fully informed consent
• “No misappropriation” rule – director must not misappropriate organisation property or
business opportunities for own benefit or that of third party
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 10• Directors must not enter into transactions where she has a
personal interest conflicting with the interests of company:
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
• Includes situations where is a real and sensible possibility of
“No Conflicts” conflict, not just actual conflict: Pilmer v Duke Group Ltd (2001) 207
CLR 165
• Two types of conflict
• Duty vs. Interest conflicts – presence of some personal interest
of the fiduciary (e.g. financial interest)
• Duty vs. Duty conflicts – presence of another duty which is
inconsistent or irreconcilable with the fiduciary duty (e.g.
directors holding simultaneous directorships of competing
companies)
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 11• Rule extends to shareholdings held by directors and indirect
holdings as trustee for others: Transvaal Land Co v New Belgium
(Transvaal) Land and Development Co [1914] Ch 488
• If is a conflict, transaction is voidable (company can ratify or set
“No Conflicts” aside)
• No defence that director acted without dishonesty, or that
company suffered no loss: Chan v Zacharia (1984) 154 CLR 178;
Boardman v Phipps [1967] 2 AC 46
• Exception if director makes full disclosure of nature of transaction
to members of company in General Meeting, and they approve it
by ordinary resolution: Regal (Hastings) Ltd v Gulliver [1967] 2 AC
134
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 12• Further exception if director is granted authority by
company’s constitution to proceed with involvement in the
transactions: Transvaal Land Co v New Belgium (Transvaal)
Land and Development Co [1914] Ch 488
“No Conflicts”
• Constitutional provisions are interpreted strictly: Guinness
v Saunders [FULL REF]
• Director with conflict must disclose nature and extent of the
interest and its relation to affairs of company, at a meeting of
the directors as soon as practicable after he or she has
become aware of interest: Corporations Act section 191
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 13• Director of a proprietary company can vote on any transaction
after they have disclosed their interest, and that transaction can
proceed: Corporations Act section 194
“No Conflicts”
Rule • Director of a public company who has a material personal interest
in a matter being considered at a director’s meeting, must not be
present and must not vote: Corporations Act section 195
• But, director may be present and vote if other directors (who do
not have a conflicting interest) have passed a resolution that
fully identifies the interest and states that the interest should
not disqualify director from voting: Corporations Act section 195
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 14• A director cannot make an unauthorised profit in the course
of their fiduciary duty to the company: Cook v Deeks [1916] 1
AC 554; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
• This includes the appropriation of company property,
information or opportunities in your own favour
“No Profits” Rule • No breach if director was acting in their personal capacity:
Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1
• But managing director only has one capacity – the duty to
the company: Industrial Development Consultant Ltd v
Cooley [1972] 1 WLR 443
• Different from “No Conflicts” rule – director’s actions must
result in some personal profit
• Irrelevant that company could not have made the profit
anyway: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 15• Company must give its fully informed consent
• Board consensus is ordinarily not sufficient to waive a breach
of duty: cf. Queensland Mines Ltd v Hudson (1978) 52 ALJR
399
• Needs to be a constitutional provision or General Meeting
“No Profits” Rule resolution
•Where director makes unauthorised profit, company can seek an
account of profits: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
• Breach of “no profits” rule can ordinarily be waived by fully
informed consent of General Meeting unless actions are so
knowing, wilful and egregious that amounts to expropriation of
company’s property: Cook v Deeks [1916] 1 AC 554
•General Meeting cannot waive breach of statutory duty – ASIC
can still come after you: Forge v ASIC (2004) 213 ALR 574
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 16“No Misappropriation” Rule
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 17Questions to ask
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 18Questions to consider in identifying conflicts are:
Public duty/private interest: do I have a private interest or
another public duty that may conflict, or be perceived to
conflict with my public duty as a member of a public entity
board?
Questions to ask Potentialities: are there possible benefits for me now, or in
the future, that have the potential to cast doubt on my
objectivity in this situation?
Perception: remembering that perception is important in
maintaining integrity, how will others perceive my
involvement in this situation or potential for loss of
objectivity?
Proportionality: does my involvement in this situation appear
fair and reasonable, when taken in context?
Promises: have I made any promises or commitments in
relation to the matter? Do I stand to gain or lose from the
proposed action/decision?
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 19CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 20
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 21
Australian Careers Institute Pty Ltd and Others v Australian Institute of Fitness Pty Ltd (2016)
116 ACSR 566
AIF National formalise a network with a sole objective of working together to reduce hassle,
increase profit and maintain the No 1 market position for each member at a state level and for
all at a national level
Scenarios (in
progress) Mr. Hornsey is a director of AIF, which carries on a fitness business.
existed primarily to advance the business interests of its shareholders.
Mr. Hornsey did not divert a business opportunity that came to him in his capacity as a director
of AIF National, and he did not use confidential information that he received or was privy to by
virtue of his position as a director.
Did his conduct created a real or substantial possibility of a conflict between his personal
interests and the duties owed to AIF National?
Mr Hornsey’s duties as a director included assisting AIF National to perform its role as the
national body advancing the interests of the shareholders’ businesses. He was in a position of
real conflict because his personal interest in expanding ACI’s fitness training business
necessarily impaired AIF National’s capacity to achieve the objectives stated in the
Shareholders Agreement.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 22Conflicts of Interest: recent cases
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 23Rinfort Pty Ltd v Arianna Holdings Pty Ltd
(2016) 111 ACSR 607
Conflicts of ◦ An alternate director of Rinfort was also a director
Interest: Dual of Arianna Holdings.
Roles ◦ The director caused Arianna Holdings to issue a
letter of demand for repayment of a loan to
Rinfort. This caused Rinfort to become insolvent.
◦ Director owed conflicting duties – the interest of
Arianna Holdings was to achieve the winding up
of Rinfort and the interests of Rinfort was
potentially the opposite.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 24Australian Careers Institute Pty Ltd v
Conflicts of Australian Institute of Fitness Pty Ltd (2016)
Interest: 116 ACSR 566
Competing ◦ AIF alleged director breached duties by setting up
businesses and promoting, in conjunction with ACI,
competing fitness education business called Sage.
◦ AIF and Sage had overlapping staff with dual
roles. Conduct created a real or substantial
possibility of conflict between duties as director
of AIF and personal interests in promoting Sage.
◦ ACI had knowledge of director’s dishonest and
fraudulent design and so liable to AIF for an
account of profits.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 25Edenham Pty Ltd v Meares (2016) 116 ACSR
261; [2016] WASC 301
Summary ◦ Alleged 2 former directors breached duties by
concurrently carrying on business as directors of
Judgment competitor.
Refused ◦ Factual issue of whether 2 companies in direct
competition not evident with high degree of
uncertainty. Directors’ defence of informed consent
not “hopeless.”
Golden Taste Investment Pty Ltd v Laurence
[2016] VSC 250
◦ Alleged 2 former directors breached fiduciary and
statutory duties ss 180-183 of the Corporations Act.
◦ Complex facts giving rise to claims & complex issues
directors wished to raise.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 26Re B Personal Pty Ltd [2016] VSC 211
◦ Former director of B Personal, Johann, alleged
payments made by B Personal to SB Group, which
Diversion of was controlled by another former director of B
Profits Personal, Shane, were wrongfully diverted from B
Personal.
◦ Payments were purportedly for consultancy
services provided by Shane. The VSC noted that
the payments practically functioned as a dividend
of B Personal’s profit.
◦ Even if Shane did consultancy services, they were
in the line of B Personal’s business and should
have been opportunities undertaken on its behalf.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 27KQ International Trading Pty Ltd v Yang
[2016] VSC 146
◦ Former director breached duties under s 181-182
Misappropriating of the Corporations Act by misappropriating
Funds substantial funds, failing to respond to
correspondence and failing to attend director’s
meetings.
◦ “It is easy to identify” a breach of s 181 of the
Corporations Act “because, simply put, it is clear
that the director is doing the wrong thing.”
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 28Hart Security Australia Pty Ltd v Boucousis
[2016] NSWCA 307
◦ HSA involved in negotiations to provide security
services to Northern Territory Airports.
Pursuit of
◦ Without knowledge of HSA, director entered into a
proposal ‘secret’ proposal under which new company would be
incorporated and shares would be issued so would be
holding company of HSA.
◦ Neither new entity or HSA gained contract.
◦ HSA alleged director breached his fiduciary and
statutory duties breaches of his fiduciary and ss
181(1), 182(1) and 183(1)
◦ HWL Ebsworth partners who advised HSA joined for
knowing assistance & involvement in contraventions
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 29◦ NSWCA confirmed director in breach of fiduciary duty in pursuing proposal involving new entity. ◦ Pursuit by a fiduciary of personal gain in circumstances where is actual or substantial possibility of conflict constitutes a breach of fiduciary obligation irrespective of actual motive of fiduciary and, in the case of a director, is to be assessed without reference to their subjective view as to what is in the best interests of the company: [109]. ◦ Proposal involved significant personal benefits to director and his pursuit of that proposal in face of conflict between his interest and duties was a breach of his fiduciary obligation: [120]-[123]. CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 30
◦ Where sole director proposes to issue shares in circumstances where that will result in a change of control in company, and dilution of its existing shareholder’s interest to nil, the matters that director might reasonably have to consider in discharge of duty include how that share issue will affect existing shareholder and whether it should be made aware of proposed share issue so as to be given opportunity to propose some other means of providing funds or other financial support: [113], [121]. ◦ No error in findings director not liable for breach of statutory duties. No challenge to findings that director did not use his position as a director, or use any information he obtained by virtue of being a director, improperly in order to gain an advantage for himself or new entity. CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 31
Duncan v Independent Commission Against
Corruption [2016] NSWCA 143
Conflicts of ◦ ICAC investigation into circumstances in which NSW
Interest: Role of Govt issued coal exploration licence to Cascade (2011).
Disclosure ◦ ICAC found that Obeid family interests owed a large
portion of land within tenement.
◦ Cascade Coal began negotiations with White Energy
for the sale of Cascade shareholdings. Prior to the
sale, the directors removed the Obeid family interests.
◦ ICAC findings of ‘corrupt conduct’ against directors
based on failure to reveal information about
involvement of Obeid family interests to independent
board committee set up on behalf of White Energy.
CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 32NSWCA: Ø director’s duties pursuant to s 184(1) may not be fully satisfied by directors removing themselves from positions of potential conflict. Act also imposes positive duties of disclosure on company directors Ø contravention of s 184(1) requires intentional dishonesty or recklessness, which involves a finding that the conduct complained of was dishonest according to ordinary community standards, and known by the director to be so Ø deliberate failure to disclose relevant information in circumstances where is a duty of disclosure and with full knowledge of relevant facts could be seen to be “intentionally dishonest”. CENTRE FOR LAW, MARKETS & REGULATION 2017 - DOMINIQUE HOGAN-DORAN SC 33
Questions? WOMEN ON BOARDS DIRECTORS’ CIRCLE MARCH 2017 - DOMINIQUE HOGAN-DORAN SC 34
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