Bulaw5915 Corporate Law: Case Of Assessment Answers

Answer:

Task A

The discussion to be conducted in the present task is pertaining to the judgement given in the case of Australian Securities and Investments Commission v Rich (2009) NSWSC 1229. Within this task the business judgement rule has to be understood and its rationale has to be determined.

1) The business judgement rule is contained within section 180 of the Corporations Act 2001 (Cth). Section 180 speaks about the civil obligation of the directors and other officers of the company to use care and diligence. The subsection 1 of the section 180 says that the officers and directors of a company or corporation have to use or implement their powers and exercise their duties using care and diligence that a person of reason would use (Du Plessis, 2010). This is true in case the person is a director or holder of authority of a company within the circumstance of a company. This is applicable even in the case if the person is acting and holding the same responsibilities within the company similar to the directors and the authority holders. Taking consideration of subsection 1 the business judgement rule is elaborated in sub section 2 of section 180 (Giordano, 2011). It is said that requirements of subsection 1 can be met by the directors and other members of the company and also similar duties present in the common and equity law provided certain criteria is met. This is when the directors or the officers of the company make their decisions and judgements in a bona fide manner and also for an appropriate purpose ("CORPORATIONS ACT 2001 - SECT 180", 2017). While making a business decision or judgement the directors or the officers should not have any material or personal interest pertaining to it. The directors and the officers of the company or the corporation should be adept with the subject matter of the decision or judgement they are making to ensure that they can justify the appropriateness of the judgement (Hooper, 2011). The directors and the officers of the company should genuinely have a belief that the decisions or judgements which they are taking are in the betterment and best interests of the company. This point can be rationally proved unless the belief is contrary to what a person of reason in such position would have. Thus when speaking of business judgement it refers to a decision of doing or not doing an action with respect to issues inherent in the business operations of the company. The principle behind the making of the business judgement rule is to motivate the directors to believe in their decisions which are for the benefit of the company and the members as a whole. The purpose of the rule is remove burden or liability from the shoulders of the directors with regards to the effectiveness of their business decisions.

Thus the subsection 1 of the section 180 outlines norm based standards regarding conduct for all directors and office bearers of the company which they have to follow. In this manner the general law regarding duties of the directors and office bearers of the company gets codified (Lowry, 2012). The business judgement rule within the subsection of section 180 acts as a defence in case there is contravention to the subsection 1 of the section 180. The Explanatory Memorandum contained within the Corporate Law Economic Reform Program Bill 1998 has introduced the subsection 2 of section 180. According to this memorandum, this rule is a safe harbour for those directors who use benefit of opportunities with respect to benevolent risk taking (Lan and Heracleous, 2010).

2) In order to find a source point for the application of the business judgement rule it is necessary that the parties bearing the onus or burden of proof of the elements of section 180 (2) of the Corporations Act 2001 (Cth) have to be identified. This is important because findings of facts are often applicable in cases which are linked with the business judgement rule. Thus Justice Austin who presided in the present case that determining the onus or burden of proof is important to analyse the business judgement rule (Altman and Hotchkiss, 2010). While interpreting the provisions, the judge came to the conclusion that the legal provisions did not clearly show which parties held the responsibility of proving the implementation of the business judgement rule. The judge could not make any conclusion by simply going through the text. The judge could not extract any information from the legislative policy consideration statement contained in the Second Reading Speech and the Explanatory Memorandum. The judge took reliance of the business judgement rule of the United States which was a major influence on the construction of the business judgement rule contained in Section 180 (2) of the Corporations Act 2001 (Cth). The business judgement rule of the United States has placed the burden of proof on the plaintiff (Johnson, 2011). The judge has outlined the practical difficulties which could arise in ascertaining the burden of proof to be applicable either on the directors and the officers or the party alleging the liability. The judge ultimately determined that this decision should be determined at an appellate level. The business judgement rule of America seeks to protect the directors with respect to their decisions taken by them in relation to the business. The opposing party has to provide rebuttal to this presumption. If this alleging party fails to rebut, the directors will be protected by the existing business rule of America.  However as per the business judgement rule of Australia and decision of Justice Austin the onus of proof is placed on the directors and the officers.

3) The reasoning of the judge in the present in the interpretation of what is provided in section 180 (2) (d). Under this provision the directors are required to have a rational belief that the decisions or judgements are in favour of the company’s interests. Herein it is further provided that the point will be considered rational unless such belief is contrary to a reasonable person’s belief (Jones and Welsh, 2012). Thus the business judgement rule has been considered to be mere lying down of rules and does not hold any practical implementation. It is as stringent as the normative standard of rules propounded in subsection 1 of the section and is equally stringent. It is difficult to consider it as defence to the earlier section. Thus critics such as Neil Young QC believe that this ambiguity has resulted in lack of litigations and cases based on section 180 (2)  because of limitations in its scope of operations. ASIC had contentions regarding the impact of section 180 (2) (d). They also said that rational belief meant that the belief of the directors must be ascertained from the levels of reasonableness. However it would be impossible to provide defence with respect to a decision which is based on a belief that is unreasonable. The commission also objected to the fact that all directors could not be reasonable (Hazen and Hazen, 2012). The judge agreed to the fact that no degree or level can be determined to measure reasonableness. He admitted that a belief could be either reasonable or unreasonable. There could not be middle path or measure to determine the reasonableness. Thus the judge makes a clear demarcation between a reasonable person and an unreasonable person. He has agreed that if the meaning of the word ‘reasonable’ is utilised for defining rational belief then whatever submitted by ASIC can be considered as true and accurate (Hiller, 2013). However, the judge came to the conclusion that if the submission of ASIC was taken into consideration it would make section 180 (2) in fructuous and defunct. This would clearly contravene the intention of the drafters of keeping the standard lenient compared to the ideal levels of reasonableness. Justice Austin has tried to bring out another alternative way to interpret the section which would be more viable and devoid of ambiguity and absurdity. The judge gave the reasoning that the drafters wanted to interpret the term ‘rationally believe’ according to the business judgement rule created by the American Law Institute (Laster and Zeberkiewicz, 2015). This is seen the precedents contained in most of the jurisdictions of United States. According to the judge, those who drafted the definition of ‘rationally believe’ wanted to focus on the fact that reason or reasoning is derived. This means that the belief of the officers and the directors would be rational if it was base on reason or reasoning. This is immaterial of the fact that he judge is not convinced with the reasoning.

Task B

This particular task relies on the case of Australian Securities and Investments Commission v Mariner Corporation Limited (2015) FCA 589. It deals with fault of the directors in terms of contravention of duty to take care and being diligent in their decision making.

1) In the present case the application put up by ASIC was dismissed by Justice Beach from the Federal Court. The application was that the directors of the Mariner Corporation had breached their duty of acting in a diligent manner and acting with due care (Clark and Babson, 2011). This contravened the provisions of section 180(1) of the Corporations Act. The allegation was that the defaulter company decided in a reckless manner by announcing that they would take over Austock without having sources of finance. However the judge opined that all the directors had complied with mentioned elements of the business judgement rule propounded in section 180 (2) and this exonerated them from the allegation (Klettner et al., 2010).

2) From the evidence received, Justice Beach came to the conclusion that directors of the Mariner Corporation did not act in a reckless manner. He had set a structure based on which the aspects of section 180 of the Corporations Act 2001 could be analysed. Thus he identified certain factors on the basis of which duty would depend. This is for taking into consideration of the fact whether the directors of Mariners Corporation had exercised their duty to act with reasonable care and diligence (Marshall and Ramsay, 2012). The factors included the circumstances of Mariners Corporation which included aspects like its size and nature of business. It also takes into consideration aspects like volume of sales and nature of products and services offered by them. It takes into consideration the provisions mentioned in their Constitution. It also takes into account details and composition of the board of directors of the company. Other factors include the position and responsibilities of the directors. Factors like skills and experience of the directors are also of significance. The terms and conditions on the basis of which the directors have assumed the role of a director is also of importance. Another important factor lies in how the roles and responsibilities of the company have been distributed among the directors and the employers (Nicholson and Newton, 2010). Factors like information sharing, reporting and other requirements are also of relevance. Finally relevant legislations and situations are pivotal for the analysis of the legal provision. All these aspects have to be considered according to Justice Beach for the analysing director’s duties.

3) When referring to entrepreneurial approach it refers to the risk taking ability of the directors. Justice Beach did not take into cognizance of the requirement of the directors to take an entrepreneurial approach. He has made notable observations pertaining to the liability of the directors with respect to taking risks (Ribstein, 2011). He has differentiated between ASIC and defendants in terms of the extent to which the directors have flouted section 180 due to the reason of contravention by the company of another legal provision of the same legislation. The duty contained under section 180 of the Act does not put a broad range of obligations on the directors with respect to ensuring that the matters of the company are carried out in a lawful manner. It should not be used as way to check the accessorial liabilities of the directors. The judge believes that it would be wrongful to say that if a director leads to the company breaching a provision of the Act, he has contravened section 180. These circumstances would not breach the section until actual loss is caused to the company due to the other breach or it was foreseeable that the conduct would act against the company’s interest or the interests of the creditors and shareholders of the company (Batrouney, 2016). Thus for an act or omission of the directors to be considered as a contravention of the section 180 it is important that foreseeable harm should be there.

4) In the present case Justice Beach made analysis of elements of the business judgement rule contained in section 180 (2) by relating with the case scenario. Under the first requirement of the section there had to be a judgement pertaining to business. Under a business judgement a decision has to exist regarding taking or not taking action in context to operations of business of the company. Here in the business judgement was the judgement of taking over Austock which acted as the starting point of the legal decision (Langford, 2016). It could be proved as a business judgement on the basis of the nature of business of the company and possible gains that could be derived by Mariner by taking control over Austock. Thus Justice Beach dismisses the claim of the ASIC that the directors did not comply with the legislation and their citing of the cases that were set aside. On the other hand the directors had complied with the legal requirements of the section.

The second aspect of the provision was that the judgement had to be based on bona fide reasons and for a good purpose. The directors had satisfied this requirement. One of the directors Mr Olney- Fraser had decided to take a stance on the takeover and made an announcement on 25^th of June believing that Mariner had the possibility of making profits. He had believed that the decision of making the announcement and effort to acquire Austock was serving positive interests of the company (Pelling and McGuire, 2015). The judge was also convinced that there was no material personal interest of the directors in regards to the decisions taken and the subject matter of the decisions. Thus the third requisite was also fulfilled. The judge was convinced that the directors had enough knowledge to make the judgement thus confirming the final requirement.

5) With respect to the concept of reasonable belief, Justice Beach has referred to the comments provided by Justice Austin in the case of Australian Securities and Investments Commission v Rich reinstating the fact that the reasonableness of the belief of the directors should be determined on the basis of certain factors (Bainbridge and Connor, 2016).

• This includes relevance and essence of the business judgement to be made.
• It includes time remaining for deriving information and the costs incurred for deriving the information.
• There is relevance of the confidence that the officers and directors have with respect of pursuing the matter.
• The condition of the company at the time of the decision taken is also important.

References

Altman, E. I., & Hotchkiss, E. (2010). Corporate financial distress and bankruptcy: Predict and avoid bankruptcy, analyze and invest in distressed debt (Vol. 289). John Wiley & Sons.

Bainbridge, W., & Connor, T. (2016). Another Way Forward? The Scope for an Appellate Court to Reinterpret the Statutory Business Judgment Rule. COMPANY AND SECURITIES LAW JOURNAL, 34(6), 415-437.

Batrouney, E. (2016). Are the legal risks faced by company directors in Australia intolerable?. Victorian Bar News, (159), 68.

Clark Jr, W. H., & Babson, E. K. (2011). How benefit corporations are redefining the purpose of business corporations. Wm. Mitchell L. Rev., 38, 817.

CORPORATIONS ACT 2001 - SECT 180. (2017). Austlii.edu.au. Retrieved 17 May 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html

Du Plessis, J. J. (2010). A comparative analysis of directors' duty of care, skill and diligence in South Africa and in Australia: corporate governance and mergers & takeovers: part ll. Acta juridica, 2010(1), 263-289.

Giordano, F. (2011). Company Secretary: Financial Reporting Duties of Directors-Ten Corporate Governance Lessons from Centro for Non-Executive Directors of Listed Public Companies. Keeping good companies, 63(7), 390.

Hazen, T. L., & Hazen, L. L. (2012). Punctilios and Nonprofit Corporate Governance-A Comprehensive Look at Nonprofit Directors’ Fiduciary Duties.

Hiller, J. S. (2013). The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), 287-301.

Hooper, M. (2011). The Business Judgment Rule: ASIC v Rich and the reasonable-rational divide. Epublications.bond.edu.au. Retrieved 4 May 2017, from https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1021&context=cgej

Johnson, K. N. (2011). Addressing Gaps in the Dodd-Frank Act: Directors' Risk Management Oversight Obligations. U. Mich. JL Reform, 45, 55.

Jones, R. M., & Welsh, M. A. (2012). Toward a Public Enforcement Model for Directors' Duty of Oversight.

Klettner, A., Clarke, T., & Adams, M. (2010). Corporate governance reform: An empirical study of the changing roles and responsibilities of Australian boards and directors. Australian Journal of Corporate Law, 24(2), 148-176.

Lan, L. L., & Heracleous, L. (2010). Rethinking agency theory: The view from law. Academy of Management Review, 35(2), 294-314.

Langford, R. T. (2016). Corporate Culpability, Stepping Stones and Mariner-Contention Surrounding Directors' Duties Where the Company Breaches the Law.

Laster, J. T., & Zeberkiewicz, J. M. (2015). The rights and duties of blockholder directors. Bus. Law., 70, 33-54.

Lowry, J. (2012). The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey. The Modern Law Review, 75(2), 249-260.

Marshall, S. D., & Ramsay, I. (2012). Stakeholders and directors' duties: Law, theory and evidence.

Nicholson, G., & Newton, C. (2010). The role of the board of directors: Perceptions of managerial elites. Journal of Management & Organization, 16(02), 204-218.

Pelling, L., & McGuire, N. (2015). Court finds directors fulfil the requirements of the statutory business judgment rule. Governance Directions, 67(9), 533.

Ribstein, L. E. (2011). Fencing Fiduciary Duties. BUL Rev., 91, 899.