Dealing with Directors

This is one of the most difficult issues when dealing with directors, the task of managing board confidentiality, not just during their term but after they have left the Board.  

There is no good answer to this, while the Corporations Act makes the breach clear how it is enforced depends on how you interpret “personal gain” where a director considers that information should be released to the market and the board declines, there are arguments that the director may not have a case to answer.  

In the first instance, the party that needs to take action for the breach is the company and they need to quantify the gain or the detriment caused to the company.

Statutory

The duty of care that a director owes to the company is set out in section 180 to 184 of the Corporations Act including their obligations to act with care and diligence.  

Most importantly there is a specific duty under section 183 of the Corporations Act in respect to the use of information obtained as a director. A director whether current or retired must not use information obtained in their capacity as a director, officer, or employee for either their personal gain or to the detriment of the company.

If a director fails to comply with their obligations, there are serious consequences which may include:

• up to five years of jail time and up to $200,000 in penalties;
• disqualification from managing a company; and
• personal responsibility to pay off the company’s debts.

One of the best easiest examples to consider when it comes to breach of confidentiality is insider trading. In ASIC v Vizard [1], the Court held that media personality Steve Vizard used corporate information obtained through his position as a director of Telstra Corporation Limited to buy shares in Telstra 

In that case, the Court was satisfied that three separate breaches of section 183 of the Corporations Act took place, and imposed a pecuniary penalty of $130,000 for each breach of director’s duty (a total of $390,000) and imposed a further order disqualifying Mr. Vizard from managing companies for a period of 10 years.

Board Charter

The second layer often used to manage Board confidentiality is the Board Charter which sets out the governance of the organisation and the Board.  

It’s the written policy document that clearly sets out the respective roles, responsibilities, and authorities of the directors and how they interact with each other.

This document can also be used to set out the remedies agreed by the Board in advance and can assist the company in substantiating the breach.

Shareholders Agreement

In private and unlisted public companies, it is not uncommon to see shareholders’ agreements that set out the relationship between shareholders, and what matters require shareholder approval, and what matters can be determined by Board. What it also can do, is to set out the contractual consequences for breaches of confidentiality by directors.  

These contractual consequences can have for more reaching impact as they often give an entitlement to seek action being taken, or being stopped, or compensation being paid without the need for relying upon statutory prosecution.

What it does do is establish claims as between the shareholders and directors rather than just claims by the company against directors

On-going Duties

The duty of care to maintain information on a confidential basis goes beyond statutory obligations and beyond a director’s appointment to the Board. In TICA Default Tenancy Control Pty Limited v Datakatch Pty Ltd[1] the former directors set up in competition to their former company. In this instance, the court held that the directors had an equitable duty to maintain confidentiality even though they had left the business.

Limited Options and Remedies

If the company or ASIC won’t initiate litigation or prosecution, then, unfortunately, there are not a lot of options to pursue when a director fails to maintain confidentiality, especially in situations where there is no personal gain.  

In these instances, the Board will ask the director to resign from the Board, but if they choose not to, then the remedies to remove them or stand them down are limited and convoluted and guided by the constitution. If the director is also a substantial shareholder the removal may be blocked.  

If the company is a public company then section 203(d) of the Corporations Act sets out a very long two-month notice process to convene a shareholders meeting to remove a director, where the director can then state their case directly to shareholders – and that won’t help “confidentiality” at all.

[1] ASIC v Vizard [2005] 219 ALR 714

[2] TICA Default Tenancy Control Pty Limited v Datakatch Pty Ltd[1] (2016) 120 IPR 98

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