Directors' breach of duty in Builders Hardware Ltd.'s takeover defense

Breach of Common Law and Statutory Duties Under the Corporations Act 2001

On 17 February 2012 Builders Hardware Ltd., made public a new share issue proposal. The Company also made it clear that this would only apply to those who registered their shares before 31 December 2003. This was done in a bid to lock out the Victoria-based Powertools Ltd. from acquiring Builders H. Ltd. The takeover issue resulted in the revelation that all was not well within Builders H. Ltd.; there is possibility that the directors might have breached common law and statutory duties as stipulated under the Corporations Act 2001. According to the Corporations Act 2001, company directors are subjected to a broad range of duties. Keenly examining these duties reveals many violations of the Act by Helen as an executive director, the entire management under the board of directors of Builders H. Ltd.

Board of Directors

The Corporations Act calls on directors to conduct their duties in good faith, avoid conflicts of interest between the company and the directors, act in the best interest of the organization, honest and exercise care and diligence. According to Welch et al., the board of directors has the responsibility of establishing corporate responsibility in the firm as well as making decisions that are in line with share holders goals. They must avoid "neglegence resulting in reasonably foreseeable harm."[footnoteRef:1]The directors of Builders were concern by the proposed acquisition because they had fears of losing their positions in the firm. This was the motivating factor of the announcement on 17 February 2012. The move to issue bonus shares at discounted rates to shareholders who had registered before 31 December 2003 aimed at deterring Powertools Ltd. from taking over Builders H. Ltd. It is critical to ask whether the move was in the best interest of Builders H. Ltd. Or the interest of the board of directors. Powertools Ltd. saw lapses in Builders H. Ltd.'s management. In addition, Powertools Ltd. was of the view that a full takeover of the Company and restructuring of the management would be more benefit the shareholders, as the current management under the board of directors was not providing value for shareholders. [1: Donoghue v Stevenson [1932] AC 562]

Other than policy implementation, the main responsibility of the board of directors is to monitor the corporate and executive performance of the Company (Sternberg, 1998)[footnoteRef:2]. It is clear that the directors were more concern about their interests and not the Company's. This being the case, then, the directors of Builders H. Ltd. violated section 180 of the Corporation Act 2001, Care and diligence, subsection 2, business judgment rule (Office of Legislative Drafting and Publishing, 2012).[footnoteRef:3] The directors are required to pursue and serve the interest of all the Company's shareholders and not just a section of the directors or the stakeholders or even one of the director's personal or commercial interests. In circumstances of acquisition or proposed acquisition, the duty of the directors is to act in the best interest of all the shareholders of the Company. The courts emphasise the importance of company interest over any other interest, (Ramsay & Stapledon, 2001).[footnoteRef:4] The establishment of Company's corporate responsibility requires the directors to put in place an internal mechanism to regulate the actions taken by the people within the company to maintain their consistency with corporate objectives (Lipton & Herzberg, 1998).[footnoteRef:5] Further violation of the Corporation Act by the directors is evident in the way they handled Helen's negotiation with Powertools Ltd. Helen, in accordance with the Corporation Act 2001, disclosed of her interest in H. Tools to the Company. Despite this fact, the board of directors still entrusted her to negotiate on behalf of Builders H. Ltd. with Powertools Ltd. The directors failed to meet the required threshold of care and diligence by delegating to Helen sensitive company duties without paying any further attention. They should have taken active interest in the affairs of Powertools Ltd. To know whom they were dealing with. [2: Sternberg, E., 1998. Corporate Governance: Accountability in the Marketplace. London: Institute of Economic Affairs.] [3: Office of Legislative Drafting and Publishing, 2001. Corporations Act 2001. Canberra: Office of Legislative Drafting and Publishing.] [4: Ramsay, I. & Stapledon, G., 2001. Corporate Groups in Australia. Australian Business Law Review, 29, p.7.] [5: Lipton, P. & Herzberg, A., 1998. Understanding Company Law. Sydney.: LBC Information Services.]

Adherence to the Corporations Act 2001 provides a structural mechanism that can influence a company's operations positively by enhancing governance. This is one way of minimizing on such malpractices as witnessed in Builders H. Ltd.'s management.

Helen

Helen, an executive director of Builders Ltd., is the most controversial figure in this case. Her actions account for the legal issues arising within the Company. Helen disclosed to Builders H. Ltd. about her interests in H. Tools and she did this as required by the law. However, this is the only act she did that was consistent with the law.

First, despite Helen having made a disclosure of her interest in H. Tools to Builders Hardware Ltd. In accordance with the Corporations Act 2001, she did not do the same for H. Imports pty Ltd. Section 191 of the Corporations Act requires directors to make open their interest whether material or personal in matters related to the company's operations. The concern director should inform the other directors in a notice that includes the nature as well as the scope of the interest. Helen should have made known her interest in the contract with Powertools Ltd. To the directors of Builders H. Ltd. In accordance with the requirements.

Second, Helen "neglected her duty to act in good faith, in the best interests of the company and for a proper purpose" (Office of Legislative Drafting and Publishing, 2012). The Corporation Act in section 181 subjects company directors and other office bearers to take authority in performing their duties to benefit interest of the company as opposed to self and sectional interest. If this is violated, then, it may be considered a breach of duty in accordance with the Act. Helen consulted with the directors of powertools without the knowledge of Builders H. Ltd. And suggested a higher contractual rights offer for the distribution of the power tools through her company, H imports. As a matter of fact she proposed a halt to further negotiations between Powertools Ltd. And Builders H. Ltd. until Power tools Ltd. had had contacted her company H. imports.

Nonetheless, it is interesting to note that soon after the consultations, Powertools made clear the intention to acquire Builders H's market share in Melbourne hardware market and that it had already acquired 14% of shares in Builders H. It is most likely that in the course of these negotiations, Helen passed confidential information to Powertools. Helen appears to put self- interest first and not company interest. This suggests that she might have handled Builders H. information recklessly thereby attracting much interest from Powertools. The director is expected in the course of exercising directorial duties to safe guard confidencial company information unless authorized by the company.

Third, Helen violated section 180 of the Corporation Act 2001, Care and diligence, subsection 2, business judgment rule. This section subjects directors and other office bearers of the company to "exercise a reasonable degree of care and diligence in the exercise of powers and the discharge of duties" (Office of Legislative Drafting and Publishing, 2012).[footnoteRef:6] Helen as a director of Builders H. Ltd. had personal interest in the subject matter between Builder H. Ltd. And powertools Ltd. She successfully obtains the distribution rights from Powertools to H. imports instead of Builders H. The law prohibits directors from positioning themselves in situations of possible conflict of interest. [6: Office of Legislative Drafting and Publishing, 2001. Corporations Act 2001. Canberra: Office of Legislative Drafting and Publishing.]

The Consequences of Breaching These Duties

According to Tomasic (2006)[footnoteRef:7], Corporations laws in Australia have under gone through tremendous adjustments over the years, they have developed into comprehensive and elegant Corporation Act, but this has not comprehensively dealt with corporate misconduct. He further advises that it is essential for corporate entities to view the Corporation Act 2001, as an organizational responsibility to create an organic approach to enforcement. This will also help organizations manage risks internally. Moreover, in recognition that most businesses are risky, courts are unlikely to move in and question boardroom decisions, provided the directors perform their duties devoid of personal interests. However, in case of reckless and foolish decisions, the courts will intervene (Hooper, 2011)[footnoteRef:8]. Helen and the other directors of Builders H. Ltd. violated four different sections of the Corporations Act 2001, with Helen having violated three and the board, one. Therefore, Helen violated three sections of the Act. [7: Tomasic, R., 2006. The Challenge of Corporate Law Enforcement: Future Directions for Corporations Law in Australia. University of Western Sydney Law Review, 10, pp.1-23.] [8: Hooper, M., 2011. The Business Judgment Rule: ASIC v Rich and the reasonable-rational divide. Corporate Governance eJournal.]

Duty to Disclose Certain Interest

The Corporation Act 2001 requires among others that a director faced with real or potential conflict of interest on a particular matter being discussed by the board to inform the board about the reasons for the conflict. Excuse themselves from participating in voting any motion concerning the matter and deliberations on the matter or resign as a member of the board. Avoidance of conflict is a major responsibility of any director, therefore, equitable fiduciary duty, is the sense to avert conflicts of interest (Harris & Adams, 2011).[footnoteRef:15] [15: Harris, H.J. & Adams, A., 2011. Australian Corporate Law. 3rd ed. LexisNexis Butterworths.]

"That no one, having fiduciary duty to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."[footnoteRef:16] [16: Aberdeen Railway Company v Blaikie Bros (1854) 1 Macq 461 at 471 -- 2, by Lord Cranworth LC]

Breach of this duty is not because an office bearer made profits from diverted business like Helen's successful deal with Powertools Ltd. To trade with H. Imports. Also similar to Adler verses ASIC which was ruled in favor of ASIC citing Alder's intention to "advantage himself at the detriment of HIH."[footnoteRef:17] The breach is because of the one allowing their personal interest to conflict with the firm's interest.[footnoteRef:18] Helen breached her fiduciary duty whether she made money out of her deal with Powertools Ltd.[footnoteRef:19] "Breach of sec (Harris & Adams, 2011)tion 191 does not invalidate the transactions (s191(4). However, it is a criminal offence although the section does not say so."[footnoteRef:20] [17: ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171] [18: Regal Hastings Ltd. v Gulliver [1967] 2 AC 134 is considered.] [19: Regal Hastings Ltd. v Gulliver [1967] 2 AC 134 is considered.] [20: Farrar, J.H., 2006. A Note on Dealing with Self-Interested Transactions by Directors. Bond Law Review, 12(1).]