First impressions count. A well-organised set of company records that contains well organised and correct documentation will create a favourable impression on a director, new director, financiers, potential stakeholders or acquirers/purchasers.
Yet in many instances, good corporate, accurate and compliant documentation is hard to find. Surprisingly many people take more pride in their own personal house keeping than their company documentation.
What follows is an overview of the implications of good corporate governance and good documentation.
Good Corporate Governance – Potential Valuation Effect
There are psychological and commercial issues at play when a purchase, investment or financing is being considered.
A good investor or financier will check each key element of a deal. That checking process will flow easily if there are good records and a documented history of sound corporate governance. Even if due diligence does not result in extra value, it will certainly eliminate many reasons where a deal could be derailed or destroyed.
Proof of functional governance will provide an investor or financier comfort. Investors or financiers will appreciate that good company records are indicative of good administration and decision making.
Stakeholder Benefits
All stakeholders benefit if the company is well-run and has good corporate governance and documents. Each shareholder has a strong interest, a right in fact, to know the company is being run in their interests. That is a fundamental investment right and an obligation of the board.
In ASIC v Australian Property Custodian Holdings Limited (APC) Receivers and Managers Appointed in liquidation (Controllers Appointed No.3), the directors were fined and disqualified after the Board attempted to introduce new fees to be charged by APC, as the responsible entity of Prime
Trust, without seeking the approval of the members of the Trust. APC highlighted the importance of maintaining high standards for board processes and minutes in the final decision.
APC also involved a conflict of interest with one of the directors who would benefit from the fees. That conflict was not disclosed and the relevant director claimed he had satisfied his fiduciary obligations by abstaining from voting.
Statutory Duties of Directors
APC highlights the statutory duties of directors. In particular boardroom procedure and decision making should be undertaken and recorded, particularly in circumstances where there are:
- issues of disclosure,
- conflict of interest, and
- abstentions arise.
The duty of preparing and keeping board minutes is often left to company secretaries. APC emphasises the significance of the secretary’s role in relation to board processes and that secretaries should be prepared to uphold the responsibilities that go with the role.
Implications
The general principles for corporate directors that follow from the APC decision are:
- those who prepare and approve board minutes are obliged to exercise a high standard of care;
- board minutes should record discussions of important matters;
- each director is required to support, oppose or abstain from the resolution, and to ensure their choice is expressed and recorded in one of those ways; and
- the resolution of the directors should be recorded by having it approved and signed by all directors at the next board meeting.
APC is also an important reminder that it is an offence under section 1308(2) of the Corporation Act 2001 (Act) to make a statement in a document required by, or for the purpose of, the Act which is false or misleading. Furthermore, it should be noted that an omission which renders a board minute false and misleading would amount to a contravention under this section of the Act, and possible penalties include gaol.
Well-informed stakeholders, whether they are board members or shareholders, mean there is less chance of conflict and disputation. All eyes can remain on your sales and revenue goals if distractions are reduced.
It also decreases the chance of liability from legal disputes. There will be less poor material if a catastrophic event occurs which requires regulatory, shareholder or third party scrutiny.
Your Decision as a Director Matters
Directors must act with reasonable care and due diligence.
Directors will be taken to have met the requirements of their duty to act with reasonable care and due diligence, both under the Act and at general law, in making a business judgement if they:
- make the judgement in good faith for a proper purpose;
- did not have a material personal interest in the subject matter of the judgement;
- informed themselves about the subject matter of the judgement to the extent that they reasonably believed to be appropriate; and
- rationally believed that the judgement was in the best interest of the company.
The belief that a business judgement is in the best interest of the company will be taken to be a rational one unless the belief is one that no reasonable person in the director’s position would hold.
Again in exercising reasonable care, diligent director’s resolutions should correctly record whether a director approved, opposed or abstained from any resolution and ensure their choice is recoded correctly in accordance with the resolution.
Cover your back jack and ensure resolutions are correctly recorded.
In respect of a specific resolution, take good file notes or scrutinise the recorded minutes to ensure your resolutions correctly reflect the position you undertook.
Avoid going with the flow by simply “rubber stamping” a decision of the Board. To do so may cause an inadvertent director to penalties under the Corporations Act and possibly joint liability for activities of a director for which you failed to scrutinise.
Commercial Lawyers Sydney at Pavuk Legal can assist you with many other legal aspects.
Many other essential hot topics for business owners is all found in the book Nobody Else’s Business. Nobody Else’s Business is about helping business owners live the life they want to live, now and in the future. It is the ultimate guidebook for succession planning of modern Australian businesses.
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