The Charterbridge principle has been applied many times by Australian and English courts since its elaboration in 1970.46 Since the introduction of s 187 of the Corporations Act it has received little attention where directors of wholly-owned subsidiary companies act in the best interests of their holding company or in the best interests of the group of which their company is a member. However, it still has application where decisions are taken in the context of a corporate group by directors of companies that are not wholly-owned subsidiaries, and it is of great assistance when considering the position of directors of dual listed companies, which, as noted above, fall outside the purview of s 187.
Consider once again Justice Mason’s statement in Walker v Wimborne that directors might properly act in the interests of a subsidiary company of their own company where ‘derivative benefits’ will flow to their own company from so acting. That statement draws attention to the fact that such ‘derivative benefits’ will flow due to the position of the directors’ own company as a shareholder of the subsidiary. Justice Mason’s statement can also be interpreted to permit the making of decisions by directors of a subsidiary company that are for the primary benefit of their holding company, again due to the shareholding that links the two companies together. It is this latter situation that is expressly permitted (with the appropriate constitutional authorisation) by s 187 of the Corporations Act. The difficulty in drawing an analogy between group companies and dual listed companies that would bring dual listed companies within the scope of Justice Mason’s statement is that dual listed companies are not linked by a shareholding relationship.
However, dual listed companies are linked by contractual arrangements that seek to unify them as a single economic entity. Their fortunes stand or fall together in the same way as those of companies that are linked by a shareholdingrelationship. Indeed, the dual listed company structure is designed to ensure that this is so, and that the companies that bring themselves within it are treated as one. It is the fact that dual listed companies regard themselves and wish to be treated as one economic entity, and are so treated, that enables an analogy to be drawn between them and companies within a corporate group. This in turn enables the general law principles that were developed by courts in respect of directors of companies within corporate groups prior to the introduction of s 187 to apply to the directors of dual listed companies.
Consider once again the position of the directors of an Australian company, which has brought itself within a dual listed company structure with a foreign company, and assume that the general law principles governing the position of directors of group companies can be applied by analogy to the position of directors of dual listed companies. It can now be said that the directors of this company will be able to act in its best interests where they can identify a derivative benefit to the company in acting in the best interests of the dual listed companies as a whole, or even just in the best interests of the foreign counterpart. If such a derivative benefit can be identified, the directors of the Australian company will discharge their statutory duty to act in that company’s best interests, and their duties under the constitutions of both dual listed companies to take into account the best interests of the whole. No conflict will arise because the interests of the two companies will be consistent (although the interests of one may be contingent upon the interests of the other). Furthermore, the directors will have considerable latitude in determining whether or not there are derivative benefits to the Australian company in taking a decision, because according to the Charterbridge principle, their determination will not be impugned where they can point to reasonable grounds for having made it. Naturally, the directors will need to turn their minds to the question of derivative benefits when taking a decision that is not primarily in the best interests of the Australian company, and will need to satisfy themselves that such reasonable grounds for recognising derivative benefits exist, if they are to have the protection of the Charterbridge principle. However, the fact of the dual listed company structure and the fact that the dual listed companies operate as a single economic entity will assist the directors in being satisfied that such reasonable grounds exist.
Such an application of existing general law principles governing conflicts of interest of directors of companies within corporate groups alleviates to a very substantial degree any conflict of interest problems that directors of dual listed companies may face due to their unique position. However, there remains the potential for certain ‘hard cases’ that may not be adequately addressed by the application of existing principles. For instance, what would the directors of
DLC1 do if it were in the best interests of DLC1 taken alone to resile from the contractual arrangements that bind it to DLC2? What would they do if DLC 1 had to decide whether to entertain a takeover offer which was not extended to
DLC2 as well? The takeover offer might be very attractive to DLC1 ’s shareholders, but its realisation might cause detriment to DLC2 which would be ‘cut adrift’ of its dual listed status with DLC1 as a result. To a large extent, these difficult situations would be dealt with by the dual listed company structure itself. If DLC 1 sought to resile from its dual listed company contractual obligations to DLC2, then DLC1 would almost certainly be exposed to liability to pay damages to DLC2 for breach of contract. It is difficult to see how exposing DLC 1 to such liability could be consistent with acting in its best interests. Similarly, it will be all but impossible for a dual listed company to find itself the target of a takeover offer that is not also directed at its counterpart, because dual listed companies customarily have constitutional provisions ensuring that takeover offers must be made to both companies within the dual listed company structure. Also, modifications of the takeovers provisions of the Corporations Act can be, and have in the past been, granted by the Australian Securities and Investments Commission to bolster protection against takeover activity.
Nonetheless, the possibility remains that in the rare and difficult case where a dual listed company seeks to resile from its obligations under the contracts that have established and continue to maintain the dual listed company structure, the interests of it and its dual listed counterpart may be impossible to reconcile. In such a case, the directors, as directors of one company, will be unable to identify derivative benefits for that company in acting in the best interests of the dual listed companies as a whole, or in the best interests of the other company. Nor will they even be able to look to the interests of the whole, because in a sense there will be no interests of ‘the whole’. The ‘no conflict’ rule will be insurmountable.
Such a situation is a frontier case for which there is no adequate provision according to established principles. It is a frontier case because it arises in circumstances where a decision must be made as to the utility of the dual listed companies continuing as a single economic entity at all. Therefore, no appeal can be made to the fact of single economic existence in order to support an analogy with the treatment of corporate groups. New principles are required in order to address this type of situation. However, the new principles cannot be developed until a proper understanding is reached of the utility of dual listed companies remaining within a dual listed company structure in such circumstances. For instance, if, as a matter of policy, it is seen as important to ensure that the directors of dual listed companies must always aim to preserve the dual listed
company structure, whatever the cost to (one of) the individual companies within that structure, then it will be necessary to compel the directors of dual listed companies to disregard the interests of the individual companies within the structure in taking decisions that will ensure the continued survival of the structure as a whole. If greater emphasis is placed on the contractual structure of dual listed companies, then it might be appropriate to permit the directors of each company within the structure to revert to a traditional view of the best interests of the individual companies in a ‘hard case’, the result of which may be the dissolution of the dual listed company structure itself. This will require an exception to the general rule that the interests of dual listed companies as a whole be taken into account by the directors of each company within the dual listed company structure. Either way, principle must follow policy, and must be developed with the unique position of directors of dual listed companies in mind.