Directors have a legal duty to tell other directors of “material personal interests”.  This article discusses rules governing disclosure of, and voting on matters involving material personal and provides guidance on how to assess a material personal interest.

BY KAI SINOR

Background

The Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) sets out important legal duties that directors must comply with, commonly referred to as “directors’ duties”.  These duties have their origins in decisions made by judges over many years recognising that where there is a special relationship of trust, confidence and reliance, there should be a legal duty (“fiduciary duty”) to put the best interest of others first.

The principle that directors should avoid conflicts of interests and not take advantage of their position for personal benefit is reinforced in the legal duties set out in legislation. 

A conflict of interest occurs when the interests of a director conflict with the best interests of the corporation.  The director’s interests may be personal, professional or business in nature. The conflict arises when there is a “real or substantial possibility of conflict” or a “real, sensible possibility of conflict”.[1]Some conflicts of interests will involve a “material personal interest”.  However, not all conflicts of interests are material personal interests.  Equally, a material personal interest can arise even where there is no conflict of interest.

What does the CATSI Act require?

Section 268-1 of the CATSI Act requires directors to give notice of any material personal interest in a matter that relates to the affairs of the corporation to the other directors.  This requirement does not apply where the interest:

  • arises because the director is a member of the corporation;
  • arises from the director’s salary or payment for their role as a director of the corporation, for example, ‘sitting fees’;
  • arises because the director is a native title holder
  • relates to a contract which requires approval by the members
  • arises only because there is a contract with another corporation and the director is a member of the corporation
  • relates to directors’ insurance against liabilities as officer of the corporation.[2]

What happens after notice of a material interest is given?

A director with a material personal interest in a matter that relates to the business of the corporation is not allowed to be present while the matter is being considered at the meeting or to vote on the matter.[3]

Exceptions to this rule apply where the other directors have passed a resolution stating that they are satisfied the interest should not disqualify the person from voting or being present or where the Registrar has given approval.[4] It is not enough for a director to withdraw from voting – the interest must be disclosed.[5] A director cannot use a material personal interest to exclude themselves from discussions as a way to avoid giving information to other directors that is relevant to the decision; such information may still need to be given to the board to meet the duty exercise reasonable care and skill.[6]

Directors that participate in discussions or vote on a matter in which they have a material personal interest are in breach s 268-20(1) of the CATSI Act and could be fined up to 5 penalty units ($1,050 as of October 2019).[7]  It is a defence to a breach of s 268-20(1) to show that “for any other reason” the interest does not need to be disclosed, for example, the interests arises solely because a director is a common law holder of native title.

When is an interest considered “material” and “personal”?

The interest must be both personal and material.  Not all personal interests are considered material interests that must be disclosed.

Material

  • Whether an interest is personal requires an assessment of the relationship between the advantage or benefit the director may personally expect, and the particular matter being considered at the directors meeting.[8]
  • The interest involves a relationship of some real substance to the matter or decision.   The interest needs to be of some substance or value, rather than just a slight interest or low value.[9]
  • The nature of the interest has the capacity to influence the vote of the director on the decision to be made, and it is a kind of interest that gives rise to a conflict of interest which is real and substantial.[10]
  • The interest can be non-financial and indirect, such as an interest of an associate or relative, where the advantage is substantial.  It is the substance of the interest, its nature and capacity to impact the directors ability to perform their duties which is important.[11]

Personal

  • The interest must be of the directors themselves.
  • It will not be personal if it is an interest of someone else only.
  • The interest may not be personal if it affects the official as a member of a wide group or class and in the same manner and to the same degree that it affects other members of the group or class, for example as a member of the native title holder group

Possible examples

The following may be examples of material personal interests:

  • Approving the purchase of goods or services supplied by the business owned by a director’s family.
  • Participating in decisions on a tender submitted to the corporation where a relative or close friend is also submitting a bid.
  • Participating in negotiations and/or decisions that involve hiring a relative or friend to provide goods or services to the corporation.
  • Involvement in selection of a relative or friend as an employee.
  • Sales of corporation property or asset to a relative or friend.

Giving notice of the interest to the other directors

Notice of a material interest must be given to the other directors as soon as possible after the director becomes aware that they have a material personal interest in the matter.[12] The disclosure must identify the nature and extent of the interest and how the interest relates to the business of the corporation.[13]  As a general rule, this means ensuring that enough information has been given to enable other directors to give informed consent.[14]

Directors can give standing notice of an interest to the directors.  This notice must also provide information about the nature and extent of the interest and how it relates to the business of the corporation. A standing notice can be given at a directors’ meeting, or individually to each director in writing.  However given, the director is responsible for ensuring the nature and extent of the interest given in the notice is recorded in the minutes of the directors’ meeting.

When a new person is elected to the board of directors the notice ceases to have effect until such time that the new director, or directors, are given standing notice of the interest.[15] Standing notice of a conflict also ceases to have effect if the nature or extent of the interest materially increases above that disclosed.[16]

It is important that directors and boards seek advice on directors duties and any issues that are specific to the particular issue being considered. For more information, contact Michael Pagsanjan at info@mpslaw.com.au.

Michael Pagsanjan is a Senior Lawyer at MPS Law and was previously, amongst other roles, a lawyer with the Office of the Registrar of Indigenous Corporations.

[1] Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 103; Boardman v Phipps [1967] 2 AC 46, 124.

[2] Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) ss 268-1(3)(a)(i)-(iii), (vi)-(vii), 268-5.

[3] CATI Act (n 2) s 268-20.

[4] CATI Act (n 2) ss 268-20(4) and (5).

[5] Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260.

[6] See CATSI Act (n 2) s 265-1.

[7] See Crimes Act 1914 (Cth) s 4AA.

[8] McGellin v Mount King Mining NL (1998) 144 FLR 288, 304.

[9] Grand Enterprises Pty Ltd v Aurium Resources (2009) FCA 513 [68].

[10] McGellin v Mount King Mining NL (1998) 144 FLR 288, 304.

[11] Bell Group Ltd (In liq) v Westpac Banking Corporation [No 9] [2008] WASC 239 at [4509].

[12] CATSI Act (n 2) s 268-1(4)(a).

[13] CATSI Act (n 2) s 268-1(4)(b).

[14] Woolworths v Kelly (1991) 22 NSWLR 189.

[15] CATSI Act (n 2) s 268-10(5).

[16] CATSI Act (n 2) s s 268-10(6).