Directors' Liabilities When Things Go Wrong - Assignment Example

FINAL ASSESSMENT By Name Course Instructor Institution City/State Date Final Assessment Problem One The company directors are tasked with the management of the company's business. The replaceable rule allows them to exercise every company’s power apart from the power, which the Law or a company's constitution provision (if any) that needs the power to be exercised during the general meeting. Apart from their responsibility of ensuring their company complies with specific and general laws that are applicable to the operations of the company, the primary duty of the directors is to the shareholders. Still, in case the company is insolvent, or there is a probability of insolvency, the directors’ duties will involve the creditors. The directors according to ASIC (2016) have an involvement requirement that is irreducible and core in the company’s management. They must ensure that they take rational steps that can help them monitor and guide the company’s management. Imperatively, their responsibilities are not just limited to background experience as well as knowledge, they must understand their company business, and makes sure the company is managed. When a director decided to be part of the audit committee, he/she must ensure to work responsibly and diligently. Directors must ensure the company adhered to the audit and financial reporting requirements as stipulated by the Corporations Act, which includes keeping records and books properly. When directors overstep their mandate issues such as board independence and governance issues start cropping as evidenced in the case of Colonial First State quitting its stake in James Packer's Crown Resorts (Williams, 2016).  Still, a director can responsible for debts that the company incurs, especially when the company is unable to pay the incurred debts. This is attributed to the fact that the director has the responsible to make sure that no trade takes place when the company is insolvent. Furthermore, the director can be personally liable when they breach their duties, which consequently cause the company to experience some losses. When directors act illegally in a way that infringes the Corporations Act 2001, then they can be held responsible (ASIC, 2016). This can be evidenced by a case of Murray Goulburn, whereby the company and the board the investors for violation of continuous disclosure obligations. According to Danckert (2016), Murray Goulburn failed to tell the market sooner that it will not be able to meet its profit forecasts. In Australia, there is a legislation which allows stakeholders such as creditors affected by company wrongdoing to sue the directors as evidenced by Murray Goulburn case for debts incurred. Although risk-taking is accepted as an important element of business success, the insolvent trading laws as cited by Seng (2009) can possibly discourage directors from risk-taking activities that can result in the recovery of the firm rather than its demise. Therefore, a company’s director can be held responsible if the company is unable to repay the debts or if the company experiences losses because of his/her violation to a particular director's duties. Problem Two Generally, shareholders have a number of rights such as attending shareholder meetings and voting on important issues. Besides that, shareholders have a right to receive company announcements and reports as well as to transfer ownership; entitlement to distributions; a right to sue the company in case they act unlawfully. The right to sue the company is evidenced in a case where Murray Goulburn, the biggest milk producer in Australia and its board were sued by the investors for purportedly giving misleading information to the investors. According to the investors, the board members of the board of Murray Goulburn knew the company would not meet its targets months prior to informing the market (Danckert, 2016). According to the case, the company together with its directors knew that there were no sound grounds to make the misleading PDS representations; therefore, continuous disclosure obligations were violated. Basically, a company is owned by the shareholders, but the legal existence of the company is different and the available assets are owned by the company. Many of the company’ decisions are made by shareholders by passing resolutions, normally at a meeting. The ‘special resolution' normally involves more crucial questions that generally affects the company or is concerned with the rights of the shareholders. Normally, the shareholders are given some rights within the company, and these rights are different from one company to another and in most companies it depends on the class of shares that are held by the shareholders. The majority of companies have only ordinary shares (one class of share), but creating different classes of shares is allowed by the Australian law. However, the rights associated with different classes of shares are determined by the company and are normally set out in the constitution of the company. In the case of Colonial exiting James Packer's Crown, it seems that the rights of Colonial as a shareholder of Crown undermined since they were not involved in making crucial decisions such as moving away from non-gaming assets in the Robert De Niro's Nobu restaurant chain (Williams, 2016). Shareholders’ more powers and rights are found in the company’s constitution, the company legislation, as well as any shareholders’ agreement. Even though the shareholders are part owner of the company, they are also a legal entity (that is to say, they have a right to sue, be sued or own property) and could be a corporation or s natural person. Castledine (2015) asserts that every company should have no less than one shareholder, but the proprietary company is allowed to have fifty shareholders and are mainly non-workers. When a company underperforms due to the violation of the existing laws, the shareholders are allowed to sue the company together with its directors regardless of whether they have read the prospectus or not following the Federal Court decision. Shanahan (2015) posits that shareholders are allowed to take legal action against poor-performing or failed companies, as evidenced by the former Arasor’s shareholders after the laser technology company experienced a business failure. Shareholders can sue a company and its board for making mis­leading performance claims in a financial statement or a prospectus. Shanahan (2015) asserts that the outcome of the Arasor case can potentially impact a number of other cases filed by shareholders, which includes Melbourne City Investments, Treasury Wine Estates, and Oz Minerals. Problem Three Essentially, the company’s chairman is the board of directors’ leader whose role is ensuring that the company’s board operates effectively and efficiently. The chairman position is normally held by a shareholder, but not exclusively by the majority shareholder. It is the responsibility of the chairman to promote full involvement and regular attendance in discussions. In a number of companies, the chairman is mostly a non-executive director. On the other hand, the chief executive officer (CEO) according to ACCA (2012) is the executive team leader tasked with the everyday management of the company. Most CEOs are executive director. Owing to the past corporate scandals, investors together with reformers have increasingly emphasised the need for separating the CEO and chairman jobs, which is a corporate governance model that is common in Australia, the United Kingdom and scores of other European countries. At Murray Goulburn, the chairman, Phil Tracy and former CEO, Gary Helou are not majority shareholders at the company, but evidently the CEO and chairman jobs have been separated. The majority of the U.S. public corporations have combined the two jobs, usually split them as temporary when they are about to retire (Lorsch & Zelleke, 2005). The position of Chairman should be held by a majority shareholder because the chairman’s main role is ensuring the shareholders’ interests are well served. It is the responsibility of the chairman to look out for the shareholders. For instance, James Packer is the majority shareholder of Crown and was the chairman of the company before stepping down and being replaced by Rob Rankin. On the other hand, the CEO’s job involves managing and reporting to the board that sets priorities as well as policies according to the wishes and needs of the shareholders (such as higher capital or income gains, for safety, or a high-reward, high-risk growth policy) (Seeking Alpha, 2009). As Chairman looks out for the shareholders, the CEO looks out for the managers’ interests. Therefore, a major shareholder can be a chairman, but not a CEO for large corporations. But in countries like the US, the major shareholder can act in both capacities. This can be exhibited by Warren Buffett, who was the Buffett Partnerships’ manager and a major shareholder of numerous public corporations in the United States in the 1960s, which includes American Express. Buffett became Berkshire Hathaway’s chairman, but moved to a holding company, which fundamentally was an extension of his previous hedge fund (Seeking Alpha, 2009). Therefore, in any company the CEO is considered to be the ship’s pilot, the person that makes important strategic decisions concerning personnel, markets, products and budgets. It is the responsibility of the CEO to set out goals and create a culture, which motivates workers. Basically, the CEO is at the top according to the traditional corporate structure, but many shareholders could be the other individuals, corporate parents or investor groups. Still, the chief executive could be the company’s majority shareholder, but normally this is not the case in the public corporation irrespective of the size. Basically, biggest companies across Australia normally have market capitalisations worth hundreds of billions; therefore, their shareholders normally include mutual funds, large institutions, hedge funds, pension funds as well as banks, with all having adequate financial resources to become major shareholders. However, when the company is smaller, there is a high probability that the CEO is the majority shareholder or the only shareholder. Problem Four For both large and medium-sized superannuation schemes, Australian equities exposure often involves direct shares investment and indirect investment of unit trusts, which themselves have shares. Normally, an investment management firm is often given the responsibility of managing the direct investments of superannuation scheme in shares. When a custodian is hired so as to hold the legal title to the share investments of the scheme, it is also considered to be a standard practice. Given that the shares are registered under the custodian, therefore, the company should send notices of proxy forms and meeting. Since the shares are held on bare trust by the custodian for its client (the superannuation scheme’s trustee); therefore, the custodian has to act in line with the client’s instructions concerning the forwarding of meeting notices as well as exercising the rights to vote. In Australia, the superannuation industry is an important part of the economy that occupies a crucial role in the country’s financial markets as well as pension system. Apart from ensuring lasting sustainability in the retirement schemes, superannuation funds signify influential institutional investors capable of making decisions, which can enormously have an effect on the country’s economic development. New laws were enacted in 2005 by the Australian Government that allows workers to select the type of fund that will manage their contribution. This is in view of the fact that decision to select a superannuation fund depends on the market information as well as the information revealed by the funds. Guidelines are offered by ASIC together with APRA with regard to how the product information and guidance are disclosed by the superannuation through their promotional materials such as product disclosure statements. The Crown's governance failed to improve because the talks had been initiated with private equity firms and pension funds to privatise the casino company. Therefore, the superannuation scheme has facilitated the purchase of the casino company, but Colonial was not happy with the move. Imperatively, the Corporations Act 2001 and the SIS Act 1994 needs that the superannuation funds should allow for the regular financial disclosure, still the present funds’ disclosure is not consistent due to what Tan and Cam (2013) refers as lack of systematic transparency within the superannuation funds industry. It appears that Murray Goulburn violated both the Corporations Act 2001 and the SIS Act 1994 for inconsistent financial disclosure. Bearing in mind that the shares value has dropped almost 40% after a downgrade was announced by the company. Nisbet (2013, p.6) cite that before the board members normally have to depend on the expertise and skill of Superannuation Trustees in order to be able to manage the funds and facilitate the growth of the portfolio. Furthermore, the individuals are required to choose between investment options and different funds, normally with no sufficient understanding about the fund strategies. For instance, the Swedish Pension scheme has only four indistinguishable pension funds, and as a result, the scheme has improved performance and has reduced the strategic risk, political interference and reduces market impact (Nisbet, 2013, p.6). The superannuation funds have the right and responsibility to influence the company by meeting with the Board of Directors since the funds main role is offering maximum benefit return to the members. And the funds’ benefits are normally ranked by performance indicators, wherein performance is divided into both operational and investment performance. In this case, the investment performance is associated with the fund asset and return performance while the operational performance is related to the reporting transparency and trustee governance. There is a need for a special meeting so as to develop a suitable fund strategy capable of optimising risk adjusted returns of the pension funds. References ACCA, 2012. Corporate governance: the board of directors and standing committees. Technical Report. London, United Kingdom: ACCA. ASIC, 2016. Directors' liabilities when things go wrong. [Online] Available at: HYPERLINK "http://asic.gov.au/for-business/your-business/small-business/small-business-resources/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/" http://asic.gov.au/for-business/your-business/small-business/small-business-resources/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/ [Accessed 30 May 2016]. Castledine, L., 2015. What are the rights and liabilities of a shareholder in a company? [Online] Available at: HYPERLINK "https://legalvision.com.au/rights-liabilities-shareholder-company/" https://legalvision.com.au/rights-liabilities-shareholder-company/ [Accessed 30 May 2016]. Danckert, S., 2016. Class action filed against dairy giant Murray Goulburn. [Online] Available at: HYPERLINK "http://www.smh.com.au/business/class-action-against-filed-against-dairy-giant-murray-goulburn-20160516-govz40.html" http://www.smh.com.au/business/class-action-against-filed-against-dairy-giant-murray-goulburn-20160516-govz40.html [Accessed 5 May 2016]. Lorsch, J.W. & Zelleke, A., 2005. Should the CEO Be the Chairman? [Online] Available at: HYPERLINK "http://sloanreview.mit.edu/article/should-the-ceo-be-the-chairman/" http://sloanreview.mit.edu/article/should-the-ceo-be-the-chairman/ [Accessed 30 May 2016]. Nisbet, E.T., 2013. Influence of Board Structure on the Performance and Governance Framework of Australia’s Superannuation Funds. Research Paper. Bedford Park SA: Flinders Business School. Seeking Alpha, 2009. Why A Company's Chairman and CEO Should Not Be the Same Person. [Online] Available at: HYPERLINK "http://seekingalpha.com/instablog/399221-tom-au-cfa/4594-why-a-companys-chairman-and-ceo-should-not-be-the-same-person" http://seekingalpha.com/instablog/399221-tom-au-cfa/4594-why-a-companys-chairman-and-ceo-should-not-be-the-same-person [Accessed 30 May 2016]. Seng, V.Y.C., 2009. Directors' Duties: Financial Crisis and the obligation to consider the interest of creditors. [Online] Available at: HYPERLINK "http://www.sid.org.sg/web_publications/articles_detail/58" http://www.sid.org.sg/web_publications/articles_detail/58 [Accessed 30 May 2016]. Shanahan, L., 2015. Arasor shareholders win right to sue even if prospectus not read. [Online] Available at: HYPERLINK "http://www.theaustralian.com.au/business/legal-affairs/arasor-shareholders-win-right-to-sue-even-if-prospectus-not-read/news-story/163d9d9211bea61a27dcd11a7874d629" http://www.theaustralian.com.au/business/legal-affairs/arasor-shareholders-win-right-to-sue-even-if-prospectus-not-read/news-story/163d9d9211bea61a27dcd11a7874d629 [Accessed 30 May 2016]. Tan, M.G.-S. & Cam, M.-A., 2013. Explaining Pension Fund Product and Governance Disclosure in Australia. Australasian Accounting, Business and Finance Journal, vol. 7, no. 3, pp.49-68. Williams, P., 2016. Colonial exits James Packer's Crown citing board independence. [Online] Available at: HYPERLINK "http://www.smh.com.au/business/colonial-exits-james-packers-crown-citing-board-independence-20160511-gosfaz.html" http://www.smh.com.au/business/colonial-exits-james-packers-crown-citing-board-independence-20160511-gosfaz.html [Accessed 30 May 2015]. Read More