Corporation

Corporation Law

Introduction

A fiduciary relationship is based on trust that defines the duty on directors to take action to the best interests of the company in good faith and honesty.  These duties are defined under the contract, articles and shareholders’ agreement.

The case “State of South Australia v Marcus Clark (1996)” is taken to analyze the related law and legal arguments rose by the parties and provide the judgment of the case about the duty of care and diligence.

Issues and Facts of the Case

In the case, Marcus Clark was the Managing Director and CEO of State Bank of South Australia. Clark was also blamed to be in breach of his duty to act with care and diligence. He was sued for damaging the bank on purchasing of the whole of the share capital of a life insurance company.

The fair value of the shares of the insurance company was not more than AUD21 million, but the bank purchased the shares of the insurance company at AUD59 million. No proper valuation of the share capital of the insurance company led to the loss to the bank.

The reasons were obvious as Marcus did not disclose the real valuation of the insurance company due to having conflicts of interests. On the other hand, Clark did not disclose all relevant details to Bank and its Board of Directors that resulted in the breach of duty and conflict of interest.

Clark was sued by the bank as he damaged the privacy and breached his duty under the negligence act related to duty of care and diligence.  Also, Marcus Clark tried to provide benefits to the insurance company where his family held shares.

Simply, Clark failed to disclose and ensure a proper valuation of shares that was the breach of fiduciary duties that was owed by bank according to the court law (Adams, 1997).  Overall, the case is significant to explain the good faith defense that Clark argued.

Relevant Laws & Principles relating to the Case

There are statutory duties which are imposed as standards of criminality to company officer.

Under this, the key provision is entitled as Duties of the officer of the corporation and for that Corporation Law is best suitable (Gorris, et al., 2011). Similarly, “Corporation Law” is the relevant law for this case.

Corporation law includes various sections such as:

Section 180:  Officer needs to focus on duty of care and diligence.

The rules related to duty of care and diligence explains the role of director in setting the goals for an organization for achieving it on time with optimizes utilization of resources.

At the same time, the director reviews the progress of an organization, while exercising the duties in the utmost good faith in the dynamic business environment (Sealy and Worthington, 2013).

The rules in association with the duty of care and diligence for the directors outline the principles of organizational benefits rather than personal benefit. Also, the rational behavior of the director must be determined in the best interest of the company.

It is achieved only by developing insight information about the company after monitoring the relevant affairs and policies.

Section 181: Officer needs to act honestly.

It is the duty of the director to act honestly and perform the relevant task and activities in good faith for the benefit of the company. Also, the duty of loyalty helps the person to establish their rights in the best interest of the company.

It also helps in establishing fiduciary principles of the individuals towards the organization (French et al., 2014).

The act of honestly support the organization to operates its business and set ethical standards at the working place. At the same time, the fair opportunity is also created in the organization for protecting the interest of associated stakeholders.

Section 182: Officer should not use its company position for making improper decisions.

The officers must not make unethical use of the assigned position in the organization for framing improper decisions. It is because the officer is appointed by the business for operating the managerial function in the utmost good faith and the interest of the whole organization (Svendsen, 2017).

If the officer underlines the actions for the personal interest than it is against the law and the legal conduct by the respective authority is undertaken against the individual.

The improper decision-making process affects the brand image of the company and creates difficultly in maintaining the strong relationship with the stakeholders.

Section 183: Officer must not disclose or manipulate the company information.

The confidential and private information about the business affairs must not be disclosed by everyone with the prior consent of head authority. The internal information of the company should not be revealed to the competitors for maximizing the personal interest.

Also, there must not be manipulation of facts and figures by an officer because it is treated against the law and is concerned with unlawful activities (Abell and Hobbs, 2014).

Disclose of internal information with the external parties are against the code of conduct and business ethical standards. Thus, it is necessary to the directors, officers, and employees to maintain confidentiality in the information and not to use it for personal advantage.

Directors of the company have a fiduciary duty to the company to pass up any possible conflicts of interest that may have a negative impact on the company’s interests.

This case was also an example of conflicting duties by a director who holds more than one directorship. The director faced with a position of conflict because he asked to the bank to pursue the contract which would have benefited to the insurance company in which his family had invested (Miller, 2013).

In this business judgment rule was also breached because a director or officer of a corporation needs to make a business judgment in good faith for a proper purpose. But, Clark did not make the judgment in good faith with proper purpose (Miller, 2013).

Apart from this, it is also essential for the director to avoid any material personal interest in the subject matter of judgment. But in the case, it was reported that there was an interest of the director’s family in the business judgment which was not disclosed by him to the board of directors (Bruner, 2013).

Also, it is also crucial for the director to inform about the subject matter of the judgment and make the judgment in the best interests of the corporation. But, Clark did not comply with this rule and violated it to make own benefits.

Arguments of the Parties and Analysis

In case, both parties including Clark and State Bank raised their viewpoint in respect of problem which is faced due to Clark’s action regarding conflict of interest and breach of duty and diligence.

The breach of duty has occurred in the organization when one person is obliged and has a duty of care towards another person but is unable to perform the task within the predetermined time frame (Asmat and Tennyson, 2014).

In other words, when one person fails to mark up with the expectation level of another then the situation of breach of duty occurs. In this parameter, the person is liable to pay for the personal injury caused to another person due to the breach of contract.

The legal arguments which are raised by the parties are the breach of contract and duties of care and diligence. In this case, State Bank raised argument related to breach of obligation and duty which is given to Clark at his position.

But on the other side, the bank argued that he was guilty of duty of negligence. Other members raised the question that they required an effective judgment rule for the problem which is faced by the company.

In like manner, the bank argued that he should be considered under good faith defense (Baxt, 2005).

According to Section 11 of the State Bank of South Australia Act, it was essential for the director to disclose any direct or indirect pecuniary interest in the proposal that came before the board.

At the same time, in this case, Marcus Clark was failed in underlining his duty of loyalty and care towards the State of South Australia.  Marcus Clark does not act in good faith, and his actions were against the interest of the company.

The actions are underlined for maximizing the personal profit and ignoring the image of the organization (Appleman et al., 2016). It was occurred due to conflicts of interest in between the individual and the company.

But at the same time, Clark argued that he took the decision within the interests and good faith of the company. He did not know regarding any share investment by his family otherwise he might disclose this information.

Conclusion and Court Outcome

The judgment case highlights the problem which is faced by the company due to its director Marcus Clark which had not disclosed relevant information to State Bank of South Australia.

Under this case, State Bank found Clark who damaged the Bank reputation as well as raised the problem related to duty of care and diligence (Adams, 2002). There was the liability of Clark for his actions as he did not disclose the valuable information that causes harm to the bank.

According to the Court, there was the breach of the duty of Clark for this obligation. The judge announced that there was guilty of negligence by Clark as he failed to independently value the shares.

For this, he assessed damages at AUD81 millions. The court found in this case that Marcus failed to consider the standard of care. It was expected from him as a director that he could have ordered for a sperate and independent valuation of the company’s assets.

The court said that it is supposed to the director to put the interest of the principal first above his interests. He should not take advantages of his position without expressed consent from the principal. A fiduciary must observe the entire loyalty to the principal and not be in a situation conflicting personal interests with those of the principal (Becker & Strömberg, 2012).

Role, Purpose, and Scope of the Relevant Court or Tribunal

The role of the court, in this case, was important as the court needs to investigate the possible liability of the director in the breach of duty and diligence. At the same time, the purpose of the court is to reach to particular result for the issue faced by the Bank in against of breach of duty (Lafferty, et al., 2011).

The scope of the court, in this case, is broader as judge listen to the arguments of both the parties and reach to the particular outcome. It is more crucial for the court to determine that the managing director of the bank has breached the law intentionally or through wrongdoing.

It is because there is insurance cover for the directors, who acted quite honestly, but failed to exercise the care and diligence (Velasco, 2012). If the director has a wilful breach of duty, good faith or misuse of his information or position, then D & O Insurance will not cover any fraud or dishonest.

So, it is the role of the court to determine whether there is any willful breach of the law.  Regarding the fiduciary case, it is the role of the court to determine that certain facts have been provided before presuming the liability under a fiduciary relationship.

For example, in the case of SEC Vs Chenery Corporation (1943), the judge ruled that it is not enough to say a man as a fiduciary to presume liability in case of the fault.

Therefore, it was necessary to prove the obligations of the director as fiduciary, to whom he is obligated and the level of failure to meet these obligations and outcomes of the alleged failure. After proving this, the bank could prove Clark liable for his act (Ribstein, 2011).

References

Abell, M. and Hobbs, V. (2014) Duty of Good Faith in Franchise Agreements-A Comparative Study of the Civil and Common Law Approaches in the EU. Int’l J. Franchising L., 12, pp. 25.

Baxt, R. (2005) Duties and Responsibilities of Directors and Officers. UK: AICD.

Adams, M. (1997) Australian Essential Management Law. UK: Routledge.

Adams, M. (2002) Essential corporate law. Cavendish Australia.

Appleman, J. A., Appleman, J. and Holmes, E. M. (2016) Contract Concerns: Reinsurance Contract Formation, Validity, And Judicial Construction (Vol. 14). Appleman on Insurance Law and Practice.

Asmat, D. P. and Tennyson, S. (2014) Does the Threat of Insurer Liability for “Bad Faith” Affect Insurance Settlements?. Journal of Risk and Insurance, 81(1), pp. 1-26.

Becker, B., & Strömberg, P. (2012) Fiduciary duties and equity-debtholder conflicts. The Review of Financial Studies25(6), 1931-1969.

Bruner, C. M. (2013) Is the Corporate Director’s Duty of Care a Fiduciary Duty-Does It Matter. Wake Forest L. Rev.48, 1027.

French, D., Mayson, S., Mayson, S. W. and  Ryan, C. (2014) Mayson, French & Ryan on company law. USA: Oxford University Press.

Gorris, J. M., Hamermesh, L. A. and Strine, L. E. (2011) Delaware Corporate Law and the Model Business Corporation Act: A Study in Symbiosis. Law and Contemporary Problems, 74(1), pp. 107-120.

Lafferty, W. M., Schmidt, L. A., & Wolfe Jr, D. J. (2011) A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law. Penn St. L. Rev.116, 837.

Miller, P. B. (2013) Justifying Fiduciary Duties. McGill Law Journal/Revue de droit de McGill58(4), 969-1023.

Miller, S. K. (2013) The best of both worlds: Default fiduciary duties and contractual freedom in alternative business entities. J. Corp. L.39, 295.

Ribstein, L. E. (2011) Fencing fiduciary duties. BUL Rev.91, 899.

Sealy, L. and Worthington, S. (2013) Sealy & Worthington’s Cases and Materials in Company Law. USA: Oxford University Press.

Svendsen, S. M. (2017) Comparative Analysis of the Danish Principle of Loyalty and the CISG Principle of Good Faith.

Velasco, J. (2012) The Role of Aspiration in Corporate Fiduciary Duties. Wm. & Mary L. Rev.54, 519.

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