Understanding Business Judgment Rule Under Australia’s Corporation Act
Legal Obligations for Directors under Corporation Act
Discuss about the Corporation Law for ASIC V Mariner Corporation Ltd.
In Australia, Corporation Act governs the activities of the directors by applying several provisions. Australian Securities and Investigation Commission (ASIC) inspect the acts of the directors of the companies. If any director fails to perform his duty mentioned in the Act, necessary actions are taken against him by ASIC. There are a number of cases where the directors have to maintain all the rules of the Corporation Act. However, there are certain case laws where some defense provisions have been mentioned so that the director of a company can defend their position against allegations made by the ASIC. The present case is one of them. In this case, the term ‘business judgment rule’ has been established. according to this rule, if any directors of a company make any judgment for the best interest of the company and there is no personal interest of the director lied, the same will be treated as work in good faith. No director of a company will not be held liable for such act (Langford 2016). Further, there should be rational belief regarding the conducts of the directors. In this case, scope of the alleged sections of the Corporation Act has been discussed. Further, the effectiveness of defense under business judgment rules has been discussed.
Mariner is an investment company and its share has been listed in the Australian Stock Exchange. The company deals with the merger and acquisitions. The company has bought certain shares of Austock life Insurance and made a public announcement to sell shares of Austock publicly. After the announcement, ASIC has files a case against the company alleging that the company has failed to perform its duties under section 631 (2) (b) of the Corporation Act. Further, it has been contended that the company has failed to maintain the obligations prescribed under section 1041H of the Corporation Act 2001. It has been stated by the ASIC that the company has no ability to pay off all the debts of the shares and therefore, the company should be stopped producing misleading statement (Baumgartner 2017). In addition to this, it has been mentioned by the ASIC that the directors of the company has failed to act diligently and therefore, should be held liable under section 180 of the Corporation Act 2001. However, the presiding judge of the case has found certain important facts on behalf of the company and found that not all the strategies taken by the company are contravening with the provisions of the Corporation Act 2001.
The company has made an announcement in 2012 regarding the share allocations and the company has stated to issue the capital of Austock at 10.5 cent per share. It has been observed that the company has made the announcement publicly regarding the takeover of a bid. Further, it has been stated by this section, in case any director found to make announcement of shares in the form of substantial proportion of offers, he will found to be reckless and should be held liable for the same. It has been contended by the ASIC that the alleged company has no scope to pay the amount of money and therefore, the company should not engaged in any financial service that is deceptive in nature. If any director of the company found to make such an announcement to mislead the investors, he will be held liable under section 1041H of the Corporation Act 2001 (Scarborough and Olderman 2014). In this case, it has been observed that the alleged company has bought certain shares of the Austock Insurance and announced to make a bid at 10.5 cent per share. According to section 621(3) of the Corporation Act 2001, the company is restricted to make any such announcement. Further, in case of any adverse situation, the company has no capability to refund the stated money and there is a possibility that the company can be insolvent. The Corporation Act 2001 has implemented certain grounds of duties that should be maintained by the directors of the company (Knepper et al. 2016). It has been observed in section 588G that no directors are allowed to incur any debt by which the company can be insolvent. Further, it has been mentioned in section 588G (2) of the Corporation Act 2001 that where the director of a company has the knowledge that certain act can make the company insolvent, and he did it, he will be held liable under the section and civil penalties could be imposed on him. It has also been contended by ASIC that the directors of the company have failed to comply off all the duties mentioned under section 180 and section 181 of the Corporation Act. Every director of a company is required to perform their duties diligently and in good faith. He is restrained to do anything that affects the interest of the company and the interest of the shareholders (Barker 2016). According to Section 1317E of the Act, in case any director has failed to perform his duties to this respect, he will have to face penalties under this section. Therefore, it has been observed there are certain provisions that were stated to be contravened by the alleged company to this aspect. However, the Court has passed its judgment in the favor of the company on the ground of business judgment rule and held that the activities of the company did not attract the norms of the alleged sections.
Case Study: ASIC V Mariner Corporation Ltd (2015) FCA 589
ASIC V Mariner Corporation Ltd (2015) FCA 589 is one of the historical case where the court has observed that if the activities of the company could not prove as reckless, the directors of the company could not held liable. Further, the decision of the court in this case has made the ground of business judgment rule as a good defense for the directors as against section 631 (2) (g) and section 1041 of the Act respectively. According to the court, if the directors of a company have taken any step in good faith and for the best interest of the company, such acts should not be held against the provisions of the Corporation Act 2001. Considering the precedents made in ASIC v Rich (2009) 236 FLR 1, the court has observed that if the acts of the directors are quite reasonable and attract the provision of the business judgment ground, the activities of the directors will not be treated as reckless. Therefore, the essential ingredients of section 631 (2) of the Corporation Act could not be met and the directors will not found guilty under the section (Sharfman 2017).
In this case, court has observed that the acts of the directors should consist of certain foreseeable risks in case of held liable under section 180 and section 181 of the Corporation Act 2001. If the directors of a company has failed to act prudently and the interest of the company has been affected by the acts of the directors, they will be held liable for breach of their duties. However, in this case, the court did not find that the activities of the directors of the alleged company have met any of the requirements of section 180 and section 181 of the Act. Further, it has been observed by the court that it is the duty of a director to make a balance in between the risk and reward (Stout and Blair 2017). The professional background of the directors are quite good and it is unlawful to look at the potential disadvantages of the directors without acknowledge the benefits that can arise from such activities. According to the court, potentiality of the decision making process can minimize the liabilities of the directors regarding the proposed takeover bid and overshadow the risks generated from the same.
However, considering the facts of the case, it can be observed that the financial condition of the company during the announcement was not good and the company had no capability to satisfy the obligations thereto. This proves the genuineness of the allegation made by ASIC. The directors of the company have accepted this statement and this mentality of the company attracts the provision of section 588G of the Corporation Act. Further, the company has the knowledge that the financial condition of the company is not good and still they have taken such a decision by contravening the provisions of the Corporation Act 2001. Further, this confession of the directors has proved the fact that they had made false announcement to pay for the shares to the shareholders and attracted the provision of section 1041H of the Act. However, it has been contended that the alleged company has done all the steps for the best interest of the company. According to section 52 (4) of the Companies (Acquisition of Shares) Code, “a person shall not, whether alone or together with another person, make takeover offers or cause to be made a takeover announcement, if he has no reasonable or probable grounds for believing that he will be able to perform his or their obligations, if the takeover offers or proposed takeover offers constituted by the takeover announcement or proposed takeover announcement, as the case may be, are accepted.
Business Judgment Rule as a Defense Provision
However, in order to attract the provision of section 631 (2) of CA 2001, the complainant has to show that such decisions of the company or the directors are false or recklessly indifferent. Further, there should be no reasonable ground for the directors of the company that they can make the payment to this effect (Alexander 2017). The decision of the company will be reckless in case the directors are known about the substantial risks and they took the risk that is unjustifiable in nature. In Banditt v The Queen [2005] HCA 80, it has been observed that reckless means negligent conduct. According to Court, the activities of the company do not attract the negligent provisions mentioned to this effect. There was justified ground stated by the directors of the company regarding the decisions made by them and therefore, the acts of the company could not be stated as reckless. The court has decreed in favored of the company.
The present case is quite important in case of Corporation Act 2001. In this case, the court has interpreted certain provisions of the Corporation Act. After the incorporation of the Act, most of the allegations of ASIC have been found true and the alleged directors had faced penalties due to non-performance of their duties (Admati 2017). However, this case is an exception to this rule. It has been held in this case that if a director of a company has taken a decision in good faith and if the grounds of the decisions are reasonable, then such decisions should not be regarded as reckless. Further, in this case, it has been observed that the court has able to make a balance in between the foreseeable risks and potential benefits accrued from the decision of the company (Boyer and Tennyson 2015). The present case has illustrated a successful defense regarding the decision making process of the directors. Further, the principle of business judgment rule has been established in this case. Therefore, it can be stated that the case has been proved to be an important case law in the favor of the directors of the company. However, the directors should have to check whether all the elements of the business judgment rule has been met or not (Pelling and McGuire 2015).
Further, it has been observed by the court that the directors of the company were successful to show good faith in order to make such decisions and their actions are quite justifiable. The directors had not acted in negligent way and therefore, it could not be stated that the directors have failed to perform according to the provision of section 180 and section 181 of the Corporation Act 2001.
Reference:
Admati, A.R., 2017. A skeptical view of financialized corporate governance. Journal of Economic Perspectives, 31(3), pp.131-50.
Alexander, F., 2017. Benefit Corporation Law and Governance: Pursuing Profit with Purpose. Berrett-Koehler Publishers.
ASIC V Mariner Corporation Ltd (2015) FCA 589
ASIC v Rich (2009) 236 FLR 1
Banditt v The Queen [2005] HCA 80
Barker, R., 2016. The Duties and Liabilities of Directors—Getting the Balance Right. The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, p.249.
Baumgartner, A., 2017. ” Functional Reception” Exemplified by the Austrian Business Judgment Rule:(more Than) a Comparison with Germany and Delaware (Doctoral dissertation, Harvard Law School).
Boyer, M.M. and Tennyson, S., 2015. Directors’ and officers’ liability insurance, corporate risk and risk taking: New panel data evidence on the role of directors’ and officers’ liability insurance. Journal of Risk and Insurance, 82(4), pp.753-791.
Knepper, W.E., Bailey, D.A., Bowman, K.B., Eblin, R.L. and Lane, R.S., 2016. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.
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Scarborough, R. and Olderman, R., 2014. Why Does the FDIC Sue Bank Officers: Exploring the Boundaries of the Business Judgment Rule in the Wake of the Great Recession. Fordham J. Corp. & Fin. L., 20, p.367.
Sharfman, B.S., 2017. The Importance of the Business Judgment Rule. NYUJL & Bus., 14, p.27.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.