Week 10 - Director Accountability

Question 1

what is the purpose of a corporate governance system?

Answer 1

to effectively restrict and monitor the powers vested in decisionmakers

Question 2

what does it mean to usurp?

Answer 2

overtake

Question 3

how does the law protect the interests of SH ito mgmt?

Answer 3

by holding mgmt accountable, as SH’s control does not extend to the decisions made by mgmt

Question 4

what may a director NOT be?

Answer 4

• disqualified

- ineligible

Question 5

what makes a person ineligible of being a director?

Answer 5

• juristic person
• unemancipated minor
• does not satisfy MOI requirements

Question 6

what makes a person disqualified from being a director?

Answer 6

• declared delinquent
• unrehabilitated insolvent
• prohibited ito public regulation
• removed from office due to misconduct from dishonesty
• convicted/imprisoned/fined for theft, fraud, perjury or misrepresentation

Question 7

what does s76 say about the conduct of directors?

Answer 7

• may not use position for personal gain/advantage
• may not knowingly cause harm to company
• must communicate to board relevant info to the board unless publicly available or immaterial

Question 8

in what way should the director act?

Answer 8

• good faith
• best interest of company
• degree of skill, care, diligence

Question 9

what does the business judgement rule state?

Answer 9

a director will not be held liable for breach of their duties if they:

• take reasonable steps to become informed about matter
• has either: no financial interest or disclosed their financial interest ito Act
• believes the decision was in best interest and has a rational basis for the belief

Question 10

who may a director rely on for advice and info?

Answer 10

• employees if believed to be reliable and competent
• legal counsel, accountants RETAINED by company for matters regarding that person’s professional skills
• committee to which director is not a member

Question 11

how does the Act define reckless trading?

Answer 11

a company carrying on its business recklessly, with gross negligence, with the intent to defraud any person or for fraud purposes

Question 12

what does defraud mean?

Answer 12

illegally obtain money from someone through deception

Question 13

what will the Commission do if it has reasonable grounds to believe that it is engaging reckless trading/becoming insolvent?

Answer 13

may issue a notice to the company so that it can prove that it should still be permitted to continue its trade

Question 14

how long does the company have to prove it is not recklessly trading/becoming insolvent?

Answer 14

• 20 business days

- if it fails, Comm may issue a compliance notice requiring company to stop trading

Question 15

what must a director do if he has personal financial interest in a matter?

Answer 15

• disclose the interest, its general nature and any material info relating to it before it is considered
• disclose insights/observations if requested
• leave the meeting immediately
• not take part in consideration

Question 16

what will a director’s presence at a meeting be regarded as if they have a personal financial interest in the matter being considered?

Answer 16

• present for valid meeting quorum purposes

- absent for determining if sufficient SH to pass a resolution

Question 17

what must the director do if the matter has already been approved?

Answer 17

• disclose the interest, its general nature and any material info relating to acquisition of interest
• court may declare transaction valid even if requirements not met

Question 18

what happens if a company has only one director who does not hold all issued securities?

Answer 18

he may not approve/enter into any agreement in which he/related person has financial interest, unless approved by ordinary resolution after nature of interest is disclosed

Question 19

what are the exclusions where the personal financial interest requirements do not apply?

Answer 19

• removal of a director
• decisions which may affect all directors or a class of persons where the director happens to be a member
• a company where there is only one SH and director

Question 20

when may a director be held liable? (general)

Answer 20

for any losses sustained based on a breach of fiduciary duty or negligence

Question 21

what is negligence?

Answer 21

failure to act with reasonable care

Question 22

in which situations may a director be held liable for losses/damages?

Answer 22

• acted on behalf of the company and bound them without authority
• signing/authorizing misleading FS
• if party to an act/omission by a company despite knowing it was to defraud

Question 23

when may a director be liable for being present in a meeting?

Answer 23

if they participate in or fail to vote against:

• issue of unauth shares
• issue of financial assistance contrary to MOI

Question 24

what is the constructive form of knowledge?

Answer 24

means the director must have known or reasonably ought to have known

Question 25

who are all the individuals that these standards apply to?

Answer 25

- directors - prescribed officers - alternate directors - committee members

Question 26

what does indemnification mean?

Answer 26

compensate for a loss

Question 27

when may a company advance expenses to a director for litigation relating to service to the company?

Answer 27

- if proceedings are abandoned / director is declared not guilty (exculpated) - indemnification relates to the matter in the proceedings (unless MOI says otherwise)

Question 28

when may the company indemnify a director?

Answer 28

for any liability arising, unless it relates to willful misconduct or willful breach of trust

Question 29

what does the general limitation say about provisions in a rule/MOI/resolution?

Answer 29

provision will be void to the extent that: - it relieves a director of their duty/liability - negates/limits the legal consequences arising from willful breach or misconduct

Question 30

can a company pay a fine imposed on a director on his behalf?

Answer 30

no, as criminal liability is excluded

Question 31

which individuals can order an order of delinquency for a director?

Answer 31

- SH - company - Commission - company secretary - POs

Question 32

when MUST the court declare a director delinquent?

Answer 32

- if he consented to being a director when ineligible/disqualified - acting in a manner which amounts to gross negligence, willful misconduct, breach of trust - inflicting harm on the company (intentionally or through gross negligence)

Question 33

when is delinquency unconditional and lasting a lifetime?

Answer 33

if he consented to being a director when ineligible/disqualified

Question 34

when is delinquency lasting 7 years and court can impose conditions?

Answer 34

- acted in a manner which amounts to gross negligence, willful misconduct, breach of trust - if he inflicted harm on the company (intentionally or through gross negligence)

Question 35

who can apply for an order of probation?

Answer 35

- SH - company - Commission - company secretary - POs

Question 36

how long does an order of probation last?

Answer 36

5 years

Question 37

why could an order of probation be applied for?

Answer 37

if the director: - acts in a manner materially inconsistent with director duties - present at meeting and fails to vote against resolution despite knowing that company fails S&L test

Question 38

what are the remedies against directors?

Answer 38

- declare them delinquent - order probation - remove them as directors