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Corporate Law: Duties of directors, conflict of interest, corporate opportunity

Problem solving question on corporation law

Transparent Corporate Governance Pty Co Ltd (TCG), a consulting ,has a board which includes C and D. The company has deleted Replacement Rule s.194,following some earlier turbulence.

At the initiation of board members C and D ,on the incorporation of TCG ,the company had purchase extensive corporate governance training materials from C and D .These materials have never been used by TCG as such, since they aimed at directors of ASX- Listed companies , and TCG did not have any ASX- Listed public companies as clients. C and D informed the board that since their training packages had not been utilised by TCG, they were prepared to buy them beck from the company, at the price for which they had sold them.

When the matter was discussed by the board of TCG, C and D absent themselves and did not vote on the matter . The TCG board voted to accept the offer form C and D.

C and D had previously explained to the TCG board that they wanted to start another company , which focussed upon ASX-Listed Companies internal audit functions. They did not mention the fact to the TCG board ,or its shareholders subsequently ,that several such ASX-Listed Companies had approached them. They were approached because they were personally well - known as the gifted innovators of other interactive corporate governance training materials ,such as they were able to purchase back from TCG.

When these facts came to light one board member remarked about C and D: " I think we should inform ASIC about these guys ".

Discuss this proposal and its possible outcomes

Solution Preview

1- Duties of directors in terms of disclosure
According to the corporation law, the directors must show:
Transparency and Communication

? Directors are responsible for communicating to members, stakeholders and the public about the affairs of the corporation. C and D have not disclosed to the members of the board that they have been approached by ASX-Listed companies.

? In order to ensure effective communication, the board should:
o establish policies for communication and feedback
o establish a code of ethics for the board. We do not know the code of ethics of the board of Transparent Corporate Governance Pty Co Ltd (TCG) however; we do know that ethics procedures normally include full disclosure by the directors with customers.
o establish a complaint and grievance procedure
o meet regularly
o keep proper minutes and corporate records
o respond appropriately to requests for information. We do not know if Transparent Corporate Governance Pty Co Ltd (TCG) had requested C & D for information, however, we do know that C& D had misguided the board by telling them of forming a new company.
o develop a privacy policy

The most significant duties are:
1. To act with a degree of care and diligence that a reasonable person would
exercise in the circumstances;
2. To act in good faith;
3. To exercise powers for a proper purpose;
4. To avoid conflicts of interest;
5. To act in the best interest of the company;
6. To prevent the company incurring a debt if there are reasonable grounds for
suspecting that the company is insolvent at the time the debt is incurred or
would become insolvent by incurring the debt;
7. To not make improper use of information or their position;
8. To take reasonable steps to place themselves in a position to guide and
monitor the management of the company; and
9. To independently consider matters that come to the Board and make informed
decisions.

Effective communication from the board to its members, stakeholders and the public and the establishment of appropriate means for the latter to be heard will ensure the ability of the board to respond to appropriately to issues that may arise and to evaluate the corporation's mission and goals. In the Transparent Corporate Governance Pty Co Ltd (TCG) case there is a breakdown of communication between C&D and the board especially with regards to the potential customers of the training materials.

? Directors must ensure the proper and legal approval of:
o directors' resolutions
o members' resolutions
o external approvals, e.g. proper incorporation. Transparent Corporate Governance Pty Co Ltd (TCG) board directors have not been able to give a proper and legal approval of the resolution regarding sale of training materials to C&D.

? In order for the structure of an organization to be effective, the directors must develop proper and legal procedures for directors and members meetings. In case of Transparent Corporate Governance Pty Co Ltd (TCG) the board should have a proper conduct rules that would help the company to decide how the conduct of C& D should be treated. The type of breach of conduct that they have committed and the action the board should take against them.

? A corporate audit committee is a useful and important means to help ensure that the directors' duty to comply with the statutory and common law are satisfied by reviewing the structure of the corporation at regular intervals and reporting on whether the organization is in compliance with the laws, rules, regulations etc., and whether the management, information and control systems are in place to carry out these laws. In Transparent Corporate Governance Pty Co Ltd (TCG) one option is to refer the C&D case to the audit committee and they can decide about the action to be taken in this case.

? In addition to understanding the corporation's goals, structure, and activities, directors must understand the role of the board and their duties as directors. In the Transparent Corporate Governance Pty Co Ltd (TCG) case it is definition of the duties of the directors that is under question. The board should decide if the role of the Directors has been compromised and to what extent. What action should the company take in case of C&D? Does the past board decisions, the rules of conduct or the ethical norms dictate that the AISC be informed about C&D?

? Directors should develop a board governance policy and a code of conduct for board members to give the directors guidance for how to proceed under various ...

Solution Summary

The 2901 word solution gives a clear and thorough analysis of the issues raised in the problem.

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