Directors duties: Here’s what ASX company directors owe their investors

Some investors may think the only Directors duties are to ‘create shareholder value’. Maybe in their eyes, but not the eyes of the law. Things happen in business that are outside the control of a company and its directors and the law acknowledges that. But of course, there are occasions when directors can act to the wilful or deliberate detriment of shareholders, and this is where the laws surrounding directors duties come in.

What Directors duties are owed?

The core duties of ASX company directors are outlined in sections 180-183 of the Corporations Act. There are ‘common law’ duties, but the Corporations Act has codified them. These include that directors have to:

• Exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if he or she were in their shoes;
• Act in good faith in the best interests of the company and for a proper purpose;
• Not improperly use their information or a position (i.e. not to use it to engage in insider trading as an example);
• Manage conflict of interests;
• Prevent insolvent trading; and,
• Ensure the company complies with its statutory reporting obligations.

There are other business laws companies have to comply with that fall outside the Scope of the Corporations Act and these include competition laws, tax laws and environmental law. Breaches of these laws could also amount to breaches of duties.

Any excuses?

As we noted above, they may be relieved of liability if they were deemed to have acted as a ‘reasonable person’ in their position would have. This is very subjective, we know, but this is what courts determine.

One of the key problems directors can face is conflicts of interest. One example might be is if a director sits on the board of a stadium and a football code. Decisions by a football code to play at that stadium might not be in the best interests of that director – so he or she may excuse themselves from any meetings dealing with such discussions.

There are also specific rules on insolvent trading where directors can rely on a ‘safe harbour’ provision where they might be able to incur debts if they are developing courses of action that could lead to a better outcome. In light of its failed clinical trials, Opthea (ASX:OPT) told investors it would explicitly rely on that provision to try and save the company.

But the most important is the business judgement rule. Section 180(2) of the Corporations Act provides that a director who makes a ‘business judgement’ can be taken to have met the standards of care and due diligence if they:

• Make the judgement in a good faith for a proper purpose,
• Do not have a material personal interest in the subject matter of the judgement,
• Inform themselves about the subject matter of the judgement to the extent they reasonably believe to be appropriate, and
• Rationally believe that the judgement is in the best interests of the corporation.

Of course, no director will ever put their hand up in court and confess ‘I did not act in the best interests of the company’. They’ll argue tooth and nail they did in the face of corporate prosecutors.

Conclusion

We are not lawyers, and have only given a general overview of directors duties. Our hope in writing this column is that investors might cut their directors a bit of slack. Just because you company isn’t up 100% in the last year, it doesn’t mean directors have necessarily done anything wrong just by virtue of that fact. Of course, if directors have done something wrong and that is why the company has underperformed, then there’ll be hell to pay.

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