Dual listed companies: understanding conflicts of interest for directors



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V CORPORATE GROUPS


The rule against fiduciaries placing themselves in a position where their interests conflict with those of the person to whom their fiduciary obligations are owed is, as was noted above, very strict. However in certain situations, courts, and the Parliament, have found ways of relaxing the ‘no conflict’ rule to accommodate the realities of modern commerce.31 One particular situation in which the rule has been relaxed is in relation to companies within corporate groups.

According to s 187 of the Corporations Act:

A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if:



    1. the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and

    2. the director acts in good faith in the best interests of the holding company; and

    3. the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s act.

This provision expressly permits the directors of a company to take decisions in respect of that company that are driven by the best interests of the company’s sole corporate shareholder, so long as certain conditions are present. It is an exception to the equitable and statutory rule that directors must take into account only the best interests of their company when taking decisions in respect of it.

Section 187 of the Corporations Act was introduced as one of the many legislative reforms resulting from the Corporate Law Economic Reform Program (‘CLERP’).32 Obviously, its operation is confined to directors of wholly-owned subsidiary companies and does not extend to directors of companies that are members of a ‘group’ in any other way. It seeks to treat the directors of wholly-owned subsidiary companies as specific exceptions to the general principles governing directors’ duties. It is therefore of limited assistance in considering the position of directors of dual listed companies, who are not directors of companies within a vertical, proprietary relationship of holding company and subsidiary, but rather are directors of companies in a horizontal, contractual relationship that in some ways looks more like a relationship between partners.

Of more assistance in considering the position of directors of dual listed companies are the general law principles that courts developed in dealing with the position of directors in corporate groups prior to the introduction of s 187. Ostensibly, those general law principles simply asserted the longstanding equitable rule that directors must act at all times in the best interests of the company of which they are directors without regard to the interests of other companies in the group within which the first company rests. However, by the time s 187 was enacted, the courts had begun to apply that longstanding rule with more sensitivity to the relationships between companies that stand in a group relationship with each other. It is this more sensitive approach that is of assistance when considering the position of directors of dual listed companies.

The starting point is the decision of the High Court in Walker v Wimborne.33 In that case, the Court held that any director who is considering whether their company should lend money to another company within the same group of companies should, in order to properly discharge their duty to act in the best interests of their company, ‘consult its interests and its interests alone’.34 Nothing here suggests that the ‘no conflict’ rule is given anything but the most rigorous application. Indeed, in cases following Walker v Wimborne, this rigour has been maintained.35 For instance, in Parker v National Roads & Motorists’ Association,36 Kirby P of the New South Wales Court of Appeal said of the companies that comprised the NRMA group:

Nevertheless, they remained in the eye of the law separate companies. The directors of each company owed separate duties to each. It was not open to the directors to ignore these separate duties or to conceive of themselves as owing a higher, larger or broader duty to the group, represented by NRMA.37

This strict application is the starting point. However, the dicta of Mason J in Walker v Wimborne point to the more relaxed attitude towards companies within corporate groups that eventually caused Parliament to intervene in the form of s 187 of the Corporations Act. In declaring the principle that the interests of a company must be regarded apart from that company’s status within a group of companies, Mason J acknowledged that a company’s best interests may sometimes be bound up inextricably with what is best for the group of which it is a member. The example he cited was again that of an intra-group loan:

In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage.38



Through this concept of ‘derivative benefits’ developed by the courts prior to the introduction of s 187 in relation to companies within corporate groups, the directors of dual listed companies may find a way out of the seemingly intractable problems of conflicts of interest described above.39

The concept of ‘derivative benefits’ bears closer examination. Exactly how can the directors of company A conclude that A will gain ‘derivative benefits’ from an action that is ostensibly in the best interests of companies A and B as a whole, or simply in the best interests of company B, where companies A and B belong to the same corporate group? Fortunately, some guidance is available in the form of a principle that was laid down by Chancery judge Pennycuick J in the English case Charterbridge Corporation Ltd v Lloyds Bank Ltd.40 The Charterbridge principle, as it has come to be known, states that when considering whether directors of a company have acted in the best interests of that company in a situation where it appears that they have in fact acted in the best interests of a group of companies or in the best interests of another company within the group of which their own company is a member, the court must consider

whether an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transactions [in question] were for the benefit of the company.41



If the intelligent and honest director could have so reasonably believed, then they will be taken to have acted in the best interests of their own company. When one recognises that in light of Justice Mason’s reference to derivative benefits in Walker v Wimborne, Justice Pennycuick’s reference to the ‘benefit of the company’ is in fact a reference to the ‘direct or derivative benefit of the company’,42 the scope of the Charterbridge principle becomes clear. It affords directors great latitude to determine what is in the best interests of their company, even indirectly, having regard to their company’s particular circumstances, including the circumstance of being a member of a group of companies. Additionally, of course, courts are as a general rule reluctant to impugn reasonable decisions of directors as to what is in their company’s best interests,43 a fact illustrated by the trial judge in Equiticorp Finance Ltd (in liq) v Bank of New Zealand44 who refused to interfere with what he regarded as the directors’ pursuit of sensible commercial goals.45

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