Question

Electrics   Ltd   is   a   Sydney-based   public   company   which   produces   electronic equipment. Popper is the managing director and the other directors are Jones and Brown. Popper, through his holding of proxies for several institutions, is in a position to control 51% of the shares in Electrics.

Popper's daughter wishes to sell a large block of land she owns in Newcastle as she is in urgent need of cash. A proposal that Electrics acquire the land is put to the board by Popper. Popper tables a Real Estate Agent's evaluation of the land for $ 5 million and discloses that vendor is his daughter. Jones and Brown are initially unsure of the value of the land to Electrics Ltd. Jones satisfies himself by speaking to the company's property portfolio manager who says the land "may be useful when things pick up". Jones knows the property manager is a personal friend of Popper. Brown, who is always busy with his winery business and rarely attends board meetings, says he's happy to endorse what the others decide. The contract is approved. It transpires that zoning changes to the land that occur a few days later reduce its value well below $5 million. Advise Popper on whether he has breached directors’ duty of care he owes to Electrics Ltd.

When answering if you could please refer to the Corporations ACT 2001 that would be great :)

Answer 1

As per the Corporations Act of 2001, the following are the four main duties of directors:

a. Care and Diligence: to act with the degree of care and diligence that a person of reasonable diligence would be expected to show in the role.

b. Good Faith: To act in the best interests of the company and for a proper purpose, to avoid conflicts of interest, and to reveals such conflicts when they arise.

c. Proper Use of Position : to not improperly use their position so as to gain an advantage for themselves or someone else to the detriment of the company.

d. Proper Use of Information:To not improperly use the information gained by them in the course of their duties as director to gain an advantage for themselves or someone else to the detriment of the company.

In the given situation, there is a conflict of interest, but Popper has disclosed the fact that the vendor of the land was his daughter to the board. Having said that, he should have let the other directors of the company to have an evaluation of the property conducted by independent real estate valuers. Since Popper held 51% of the shares in Electrics, he has obviously abused his position as director by tabling the valutation of a real estate agent of his choice.

Also, the zoning changes happening a few days after the contract was approved must have been within the knowledge of Popper and his daughter. That is a possible reason why she was trying to sell off the land, as she was aware that the property price would decrease. Therefore, Popper is also guilty of not disclosing material information pertaining to the contract to the other board members.

Also, Brown as director simply did not have a say in the proceedings of board meetings as he hardly attended the meetings, and was too happy to endorse whatever decisions were taken by the remaining board members. Therefore, the effective quorum for the meeting was only one, that of Jones. Then obviously, Popper must must have also voted on the transaction. But good corporate governance requires that interested directors should not vote on contracts in which they are interested.