Research on an Australian case (ideally not more than 10 years old since the decision by the Court) involving breach of company director’s/officer’s duties under the Corporations Act 2001 (Cth).
The Corporations Act, 2001 (CA) is the legislation, which through its section 198(1) provides that the business of the company is undertaken based on the directions given by the director and this is done for the shareholders of the company. As the directors run the business and operations of the company, they have to fulfil the different duties which are covered in the CA (CCH Australia, 2011). This duty is also imposed on the key officers and employees of the company, where they have a significant role to play in the company. In such cases where the duties as have been put on the directors or the officers of the company are not upheld, or are not fulfilled as they were meant to, the pertinent individual has to bear the liabilities covered under this act. An example of an action brought for breaching of the duties of the directors and officers, is the case of Australian Securities and Investments Commission v Mariner Corporation Limited  FCA 589, where the ASIC stated that the duty of care and diligence had been contravened (Jacobson, 2015). Though, when the matter reached the court, the defence available to the directors through this act was used, to acquit the director of the charge of breaching the directors’ duties.
Facts of the case
In this case, Mariner was the defendant, which was basically a corporate investment company. The defendant wanted to purchase either all the shares of Austock Group Ltd (AGL) or a substantial number of shares in this company. In this company, the Chief Executive Officer was Olney-Fraser (OF) who had been unsolicited approached by James Goodwin (JG) on 08 June 2012. James was basically the joint managing director of Arena Investment Management Limited (AIML). Arena was a company which formed a part of the international estate arm of Morgan Stanley Inc (MSI). During the initial communication, JG had expressed his interest in purchasing the business unit of AGL pursuant to the completion of takeover. After the passage of some of the days from the initial approach being made, more discussions were undertaken between OF and JG in context of the potential purchase and of the potential of the funds being made available in order to facilitate the takeover from AIML. There had been quite detailed discussion which was undertaken between OF and JG, and yet a binding agreement was not attained amidst the two. The other directors of the company, i.e., of Mariner were not aware of the communication which took place, even when OF had presented the proposal to two of Mariner’s non-executive directors (Usher Levi, 2015).
Mariner had put out a statement to the ASX on 25 June 2012 in which it was announced that a conditional offer had been made by the company for the purpose of acquiring of all the shares of AGL and this was to be done at 10.5%. This particular offer was described as an off market offer. Mariner’s board had the impression that the value of AGL was approximately $20 million, which was the sum required for the purpose of funding this takeover. Mariner got a letter from AGL in which it had been provided that this offer had been invalid due to the price per share which was being offer. As a result of this, the bid of Mariner was increased by 11% for each share. For meeting the minimum bid price rule, the amount had to be raised. As a result of Folkestone Limited giving a more attractive offer in comparison to the takeover bid of Mariner, the Mariner’s bid was defeated. As a result of this, the Australian Securities and Investments Commission (ASIC) initiated a claim in court against the company, along with against its director, owing to the contravention of duties covered in Part 2D.1 of the CA (Australasian Legal Information Institute, 2015).
Duties/ Responsibilities breached
CA puts different duties and responsibilities on the directors of the companies (Paolini, 2014). A key provision covered under this act is section 180(1) of this act. As per this section, the directors have a civil obligation of carrying on their work in a careful and diligent manner, when the duties are discharged by them and when the powers are exercised by them, as would be done by an individual holding the same office as the director, having the same responsibilities and powers, and facing the same situation (ICNL, 2018). Such a scenario in which the provisions covered in this section are not upheld, civil obligation covered under section 1317E become applicable on the breaching director/ officer. Under this section, upon finding the breach of duty by the director or officer, the court makes a declaration of contravention. Once this declaration is done by the court, the ASIC can than make an application to the court for getting the director disqualified for a certain period from being the director in any company, in terms of a disqualification order as per section 206C. The ASIC also has the option of applying for pecuniary penalties to be paid by the director as per section 1317G of CA (Federal Register of Legislation, 2018).
Under subsection 2 of section 180 of CA, the defence from the liabilities mentioned above is stated. This section covers the defence to the directors in such cases where they make a business judgement. When this is done, they are not held liable for the civil penalties (WIPO, 2015). Based on this section, the director has to show that the judgment undertaken by them, held a proper purpose and was in good faith; this is followed by the individual lacking a major personal interest in the matter of judgement; next comes the director being informed on the matter of the judgement reasonably and also has reasons to believe that the judgment was proper; lastly, this belief had reasonable backing and was in the company’s (Jade, 2018).
This case saw the ASIC initiating claims against the directors of Mariner for contravention of section 180(1) of CA owing to the announcement by the company of the takeover bid in AGL, which showed failure of care and diligence, as a result of which the company had been in breach of section 631(2)(b). As a result of this, the company made the announcement to the authorities which then resulted in section 1041H being violated. This was in addition to the directors providing that Mariner would be bidding at 10.5% for each share and this was not possible legally owing to the applicability of section 621(3). This was coupled with the failure of all of the directors of Mariner, in taking into consideration, the regulatory restrictions in context of Mariner’s ability in acquisition of a higher percentage of shares in AGL (Australasian Legal Information Institute, 2015). Basically, the ASIC contentions were that the directors of Mariner were in breach of the provisions of CA owing to the announcement of off market takeover bid. This was due to the shortfall in the required funding for acting upon this bid, along with in the making of offer for a price which was lower than the one required by the statute (Addisons Lawyers, 2015).
Decision of Court
The facts of this were quite complicated and therefore were carefully analysed by the court. In order for the court to decide upon the takeover bid related director duty breaches, a business friendly approach was undertaken where the business decisions undertaken by the directors were analysed from business perspectives. In doing so, the warnings in the background, for questioning the second guessing of the decisions were also undertaken. It was held by the court that there were three major observations in the case brought before it by the ASIC against the directors of Mariner.
- Firstly, the directors in this case had the proper background and also were experts in mergers, finance and acquisitions. As a result of this background, the directors were able to make proper judgment calls, and could create strategies on the basis of assessment of risks for adopting the transactions, which were the central part of this case. The court also stated that the courts had to give the benefit of hindsight to the directors, for second guessing these judgements, as these required large analysis on paper in order to consider what had actually taken place at that time, and there was a need to acknowledge the speed at which such events take place in reality (Prickett and Teo, 2015).
- The court went on to state that the transactions in question had to be carefully looked upon, and an ex ante approach had to be adopted. This approach provides that an individual is not only required to look at the risks, but also has to weigh the benefits of such risks. The directors of Mariner had undertaken this very approach and the same was not required to be evaluated in context of the quoted section. This is the reason why the judges adopted a retrospective analysis of the transactions which took place and stated that this approach could not be overlooked.
- This led to the court stating that there was an absence of credibility in the evidence put forth by the ASIC for attaching Mariner’s directors. (Jade, 2015).
Justice Beach also made additional observations in this case in context of the breach of quoted duties and quashed these claims based on business judgement rule. He stated that for showing that the director had not discharged his duties properly, the reasonable foreseeable harm had to be shown on the company’s interest. There was a need of balancing this risk of harm which was foreseeable owing to the contraventions, with the potential advantages which the company could get due to going forward with the risky venture or idea. This is the reason why the court not only looked at the foreseeable risk of harm’s nature and magnitude, but also did look at the degree of the possibility of this taking place with the expenses, difficulty and inconvenience in taking steps to alleviate such action. This was in addition to the balancing of the possible risk of harm against the expected profits which could result from the undertaken risk, which was a matter of dispute here. In the view of Beach J, the management of the company had to take calculated risks which involved uncertainty and which were of commercial nature. The present of risk does not result in section 180(1) being breached. And just because such a risky venture resulted in losses for the company, the duty of directors is not taken to be contravened. In giving this judgement, reference was made to the case of ASIC v Rich (2009) 75 ACSR 1 and the difference between the two cases were highlighted, and a varied decision was given in comparison to the quoted cases, for the directors of Mariner (Jade, 2015).
Conclusion and Implications
Thus, this case acts as a proof that the provisions covered under CA are not discriminatory or harsh for the directors and that they give proper chances to the directors to defend the actions undertaken by them. Due to these reasons, in this case, the directors of Mariner were acquitted for the risky venture undertaken by them, and the claims of ASIC were quashed. This case reaffirms the strength of business judgment rule and aids the directors in continuing with the risky ventures, when the decision is undertaken in a careful manner. Where such decisions result in a loss for the company, the directors, by fulfilled the provisions and requirements covered under section 180(2) of CA, can safeguard themselves from the civil penalties covered under section 1317E of CA. Though, it is crucial that all the elements covered under section 180(2) are followed (Heading and Wood, 2015). A key lesson here is that the directors would have to show that the requirements covered under this section were fulfilled, in order to safeguard themselves against these liabilities. Nevertheless, it provides the directors would enough safety, to work in the best interest of the company, in case of risky ventures.
Addisons Lawyers. (2015) Mariner Decision Will Not Affect Takeover Bid Funding Strategy. [Online] Addisons Lawyers. Available from: https://www.addisonslawyers.com.au/knowledge/Mariner_Decision_Will_Not_Affect_Takeover_Bid_Funding_Strategy837.aspx [Accessed on: 09/01/18]
Australasian Legal Information Institute. (2015) Australian Securities and Investments Commission v Mariner Corporation Limited  FCA 589 (19 June 2015). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2015/589.html [Accessed on: 09/01/18]
CCH Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Sydney, NSW: CCH Australia.
Federal Register of Legislation. (2018) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 09/01/18]
Heading, B., and Wood, B. (2015) ASIC v Mariner Corporation Limited. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=870f24b4-10d9-4d90-b7c4-95ef5011ebd5 [Accessed on: 09/01/18]
ICNL. (2018) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 09/01/18]
Jacobson, D. (2015) Case Note: Directors Successfully Rely On Business Judgment Rule. [Online] Bright Law. Available from: https://www.brightlaw.com.au/case-note-directors-successfully-rely-on-business-judgment-rule/ [Accessed on: 09/01/18]
Jade. (2015) Australian Securities and Investments Commission v Mariner Corporation Limited  FCA 589. [Online] Jade. Available from: https://jade.io/article/398014 [Accessed on: 09/01/18]
Jade. (2018) Corporations Act 2001 (Cth). [Online] Jade. Available from: https://jade.io/article/216652/section/2204 [Accessed on: 09/01/18]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.
Prickett, F., and Teo, X. (2015) Mariner decision gives directors of bidders greater latitude when announcing takeover bids. [Online] Clayton UTZ. Available from: https://www.claytonutz.com/knowledge/2015/june/mariner-decision-gives-directors-of-bidders-greater-latitude-when-announcing-takeover-bids [Accessed on: 09/01/18]
Usher Levi. (2015) Corporate Directors & the Mariner Decision. [Online] Usher Levi. (Available from: https://www.usherlevi.com.au/corporate-directors-the-mariner-decision/ [Accessed on: 09/01/18]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 09/01/18]