Illustrating Legal Limits

Henry Dunn is the major shareholder and managing director of HD Industrial Castings Ltd, a publicly listed company on the stock exchange. He proposes that the company should pay off the debts owed on his house and his boat. The board agrees and he is advanced a sum of $400 000. Sarah Buchanan, a minor shareholder, hears about the deal and approaches you for advice. She wonders if there have been any breaches of duty by Henry. Comment. Relevant Areas of the Law What are the applicable legal provisions pertaining to remuneration and other financial benefits of a managing director of a publicly listed company?

What are the limits set by law concerning the fixing of remuneration and the pertinent procedural requirements in doing so? What are the legal remedies afforded to aggrieved minority shareholders pertaining to illegal actions committed by the top management of a publicly listed company? Applicable Legal Principles in the Instant Case Basic nature of a private company Corporations experienced a long history of evolution, initially beginning as chartered entities by the Royal Crown.

The continued expansion of economic activities and increasing complexity in business transactions led to the development of private corporations as distinct entities apart from the governing body. Various laws were passed to govern the activities and liability of a private enterprise, including the very nature of its legal personality. Corporations eventually evolved having separate legal personality distinct and apart from its founders, owners, shareholders and other persons directly involved in its operations. The landmark case of Salomon v Salomon & Co (1987) AC 22 remains the binding legal principle pertaining to the issue.

In the said case, the House of Lords ruled that the subsequent company founded and its founder who exercised sole power and responsibility in running the affairs of the company are two distinct and separate personalities. The case eventually resulted to the evolution of the concept of “corporate veil”, describing the nature of a company as separate legal persons from natural persons who found it. From the said principle stems the delineation of the extent of liability of the company and its officers. Earlier, various state and territory governments enacted their respective laws governing private corporations.

Desirous of legislating uniform laws governing all corporations in Australia and reforming further corporate laws, the federal legislature passed into law the Corporation Act 2001, currently the omnibus law governing the existence and activities of all private companies in Australia (Adams 2005, 5). Lifting the corporate veil All members of the corporation’s board of directors, including the corporate secretary, hold their respective position because of presumed consent that the company shall be managed according to what is best to its interest.

The principle is apart from the fact that members of the top management may own majority shareholdings in the company. Under the Corporation Act 2001 and common law principles, there are specific instances providing for the piercing of the corporate veil to extract liability among concerned officers, as follows: Attempt to hide illegal actions of the officers of the company; Frauds committed by officers, citing the case of Re Darby (1991) 1 KB; or

Attempt by company officers in evading legal obligations and responsibilities, in accordance with the principles enunciated in Gilford Motor Company Ltd v Home (1933), 1 Ch 935 (Maltas 2009, 167). Legal provisions on functions of managing director and directors’ remuneration Under Corporation Act 2001 (s201J), the managing director may be appointed by the board of directors to execute full executive powers and discharge the same on behalf of the entire board. However, the same provision provides that the powers and authority of the managing directors are concurrent and not exclusive of the said board.

In the Shirlaw v Southern Foundries (1936) Ltd (1939) All ER 113, the board is given so much breadth in determining the extent of powers of the managing director, including the fixing of remuneration, compensation packages and other benefits with monetary value. A fiduciary relationship exists between the managing director and the company as a whole and the specific terms of appointment are usually stipulated in a contract, commonly called as service agreement (Tomasic, Bottomley and McQueen 2002, 271).