Directors and Officers

Corporate Law: Law principles and practice

Who manages the company?

A company, as an artificial entity, must act through its agents.

A company must have a director/s (one who is a managing director).

Officers in the company perform various executive functions.

Employees are also agents of the company.

Others contracted by the company may also carry out commercial and administrative functions.

Corporate Law: Law principles and practice

Directors and officers

Directors of a company manage the company along with the officers.

Directors are also officers.

The definition of a director and officer is important because various duties and liabilities are attached.

Corporate Law: Law principles and practice

Definition of a director and officer

The definition of directors and officers is found in s 9 of the Corporations Act 2001 (Cth).

If a party is a director or officer as defined, they are liable for any duties imposed by common law and statute.

Directors and officers (and sometimes employees) may suffer penalties for breach of imposed duties.

Corporate Law: Law principles and practice

Definition cont …

A director is:

• someone appointed as a director• someone appointed as an alternate director (regardless

of the name given); or• unless it can be proven otherwise, a person not

appointed who acts in the position of director and/or whose wishes the other directors are accustomed to acting in accordance with (shadow directors).

Corporate Law: Law principles and practice

Officers

An officer is:

• a director or secretary; or• a person who makes, or participates in making,

decisions that affect the whole, or a substantial part, of the business of the corporation; or• a person who has the capacity to affect significantly

the corporation’s financial standing; or• a person appointed to the company, such as a receiver,

manager, administrator, liquidator etc.

Corporate Law: Law principles and practice

Other types of directors

• Alternate director: appointed to act in place of an appointed director (Corporations Act 2001 (Cth) s 201K)

• Shadow director: acts with the authority of a director and is therefore implied to ‘be a director’

• Executive and non-executive directors: executive directors are ‘working directors’ on a salary and are employed day to day. Non-executive directors are not agents of the company but are members of the board and advise and supervise company activities

• Managing director: a director with superior powers as an executive director, a CEO or President

Corporate Law: Law principles and practice

Board of directors

The different directors meet as a board several times a year.

The board is the collective agent of the company.

The board may allow certain chief officers and advisors to attend.

The board must comply with appropriate legal requirements concerning meetings procedures and decision-making, as well as their own company rules.

Corporate Law: Law principles and practice

The legal role of board members

• to be competent in understanding the business, its risks and potential liability

• to be honest and faithful as a fiduciary• to comply with appropriate business ethics• to ensure the company complies with its statutory

obligations• to comply with good corporate-governance principles• to ensure they have the appropriate skills required to

be part of the board, or seek further advice if required• to ensure the company does not trade while insolvent

Corporate Law: Law principles and practice

Board members

Board members must be aware of their potential liability. This applies even to non-executive directors

Non-executive directors contribute to the decision making process through their prior experience and skills.

Non-executive directors are usually paid quite significantly in some larger companies.

Non-executive directors are supposed to supervise the activities of the executive directors.

Corporate Law: Law principles and practice

Directors’ powers

Directors are assumed to have any of the required powers needed to manage a company (Corporations Act 2001 (Cth) s 198A: a replaceable rule).

A managing director can be delegated superior powers by other director (s 198C).

Directors can delegate powers to other directors (s 198D) (though directors must be careful when doing this. See Centro case, chapter 9).

Corporate Law: Law principles and practice

Directors’ meetings and procedures

The directors must meet as a Board of Directors to make collective decisions (resolutions) on behalf of the company.

Directors must comply with their company’s constitution and corporate law when holding a meeting.

Corporate Law: Law principles and practice

Some procedures required

Administrative matters may be determined by the CEO and passed to the employees (no meeting required)

At directors meetings, decisions are reached on a ‘majority rules’ basis. If the vote is tied, a chairman (with a casting vote) is required.

Directors may meet to carry out resolutions of shareholders meetings.

Reporting requirements: company secretary lodges annual reports (approved by directors) and annual return on behalf of the company.

Corporate Law: Law principles and practice

Board meeting procedure Meetings must be held regularly (4 to 6 times a year).

A meeting must have a quorum (Corporations Act 2001 (Cth) s 248F).

Corporate Law: Law principles and practice

Usual procedures at the meeting

• previous minutes and their confirmation• meeting attendees and apologies for absent directors• declaration of conflicts of interests or material interests• matters arising (a log of ongoing business items)• report from the chair• report from the CEO• items for noting or for information from the board• items for discussion• items requiring a vote by the board (also referred to as

a resolution of the board)• board reflection time (usually just involves board

members at the end of the meeting)

Corporate Law: Law principles and practice

Board decisions

Board decisions are usually made by majority vote (Corporations Act 2001 (Cth) s 248G(1)).

The chair may have casting vote (s 248G(2)).

Corporate Law: Law principles and practice

Types of decisions a board makes

• when to expand or contract the business• the company’s debt and liquidity levels, and concerns

about financial risk• the company’s borrowing levels• delays or difficulties with major projects undertaken by the

firm• new business opportunities• competitive pressures• when to seek specialist advice: e.g. senior legal advice• employee and human resources issues• litigation, including cases in which the company is plaintiff

or defendant• takeovers and guidance to shareholders• winding up the business• directors and officers’ insurance

Corporate Law: Law principles and practice

Managing the company 

The director’s role includes:

• day-to-day management of the business (e.g. employing staff, monitoring office expenses, dealing with human resources issues and so on

• longer-term strategies and planning (e.g. supply contracts, the location of the office, the purchase of plant and equipment, and borrowings by the company

• liaising with and keeping the shareholders ‘contented’.

Corporate Law: Law principles and practice

Carrying out the company’s work

Strategy: the board

Management: CEO and senior managers

Administration: managers

Operations: employees

Corporate Law: Law principles and practice

The board and its work

Chairperson

Board member/director

Chief Executive Officer

Senior managers

Employees

Corporate Law: Law principles and practice

Appointing and remunerating directors

Must comply with legislative requirements

Appointment of directors (replaceable rules)

201A–M of the Corporations Act 2001 (Cth):

• s 201A: minimum number of directors• s 201B: who can be a director (needs to be 18 years of

age)• s 201D: consent to act as director (must be written

consent)• s 201E: special rules for appointment of public

company director (must be approved by resolution at a general meeting)

Corporate Law: Law principles and practice

Appointment of directors cont …

• s 201F: appointment of single directors in a one- person company (can be done by mere signing)

• s 201G: a company may appoint a director• s 201H: directors may appoint other directors• s 201J: appointment of managing directors• s 201K: alternate directors• s 201L: signpost—ASIC to be notified of

appointment• s 201M: effectiveness of acts by directors

Corporate Law: Law principles and practice

The first directors are appointed on incorporation of the company.

The constitution will usually contain details as to the appointment of subsequent directors.

The register of directors must be regularly and accurately updated, both:

• at the company’s registered office—with ASIC, under ss 201L, 205A and 205B of the Corporations

Act 2001 (Cth); • To seek information under s 205E.

Corporate Law: Law principles and practice

Remuneration of directors

202A–C of the Corporations Act 2001 (Cth):

• s 202A: remuneration of directors (determined by a general company meeting)

• s 202B: members may obtain information about directors’ remuneration (5% or 100 members can force disclosure)

• s 202C: special rule for single director/single shareholder proprietary companies (the director can determine their own remuneration)

Corporate Law: Law principles and practice

The company secretary

• s 204A: minimum number of secretaries (a proprietary company does not need a secretary)

• s 204B: who can be a secretary (must be 18 years of age)

• s 204C: consent to act as a secretary (must be signed consent by secretary)

• s 204D: how a secretary is appointed (ASIC must be notified within 28 days)

• s 204: effectiveness of acts by secretaries (valid even if invalid appointment)

Corporate Law: Law principles and practice

The company secretary cont …

• s 204F: terms and conditions of office for secretaries (determined by directors)

• s 204G: signpost to consequences of disqualification (a secretary ceases to hold office if disqualified unless a court orders otherwise)

Corporate Law: Law principles and practice

Resignation, retirement and removal of directors

Sections 203A–F:

• s 203A: director may resign by giving written notice to the company

• s 203B: signpost to consequences of disqualification from managing corporations

• s 203C: removal by members—proprietary companies (removal can be by ordinary resolution)

• s 203D: removal by members—public companies (requires two months’ notice and must adhere to the company’s constitution

Corporate Law: Law principles and practice

Removal of directors cont …

• s 203E: directors of public companies cannot be removed by other directors (only by shareholders)

• s 203F: termination of appointment of managing director (if no longer a director)

• in proprietary companies, a director may resign (s 203A) or be removed in general meeting (s 203C)

• in public companies, a director may be removed by a resolution in a general meeting

Corporate Law: Law principles and practice

Disqualification of directors

• s 206A: disqualified persons cannot manage corporations

• s 206B: automatic disqualification (for serious offences or for bankruptcy)

• s 206BA: extension of period of automatic disqualification is possible by ASIC for up to 15 years

• s 206C: court power of disqualification (for contravention of civil penalty provisions)

• s 206D: court power of disqualification—for insolvency of two or more companies

Corporate Law: Law principles and practice

Disqualification cont …

• s 206E: court power of disqualification—for repeated contraventions of Act• s 206F: ASIC’s power of disqualification (if they were

a director of two or more failed companies)

The Act provides for a director to be disqualified in two broad categories:

• automatically (s 206B)• via court application by ASIC (s 206C–E): see

Elliot v ASIC [2004] VSCA 54, ASIC v Vizard [2005] FCA 1037.