Directors’ Duties in the OnLine Environment July 2001 Carolyn Reynolds

IS THERE A DIFFERENCE? Early thinking argued yes Now accepted that the same standard applies

WHO IS A DIRECTOR? Not only appointed directors Includes those who direct decision making or control the board

WHAT ARE THE DUTIES OF A DIRECTOR? Function of directors’ duties: to ensure the director’s loyalty to the company Duties include: to act in good faith and honestly to act with due care, skill and diligence to act for the benefit of the corporation as a whole and exercise powers for their proper purpose What are the interests of the corporation as a whole: can include interests of the holding company does not include interests of directors or employees

CONFLICTS Duty to avoid conflicts: that is, a conflict between duty to the company and other interests Must be a ‘real sensible possibility’ of conflict Circumstances where a conflict exists What are the Corporations Act 2001 requirements regarding conflicts? Directors should not divert corporate opportunities, use corporate property or divulge confidential information Directors should not make improper use of information Directors should not make improper use of position

INSOLVENT TRADING Personal liability for directors Where company is insolvent or likely to become insolvent Cannot allow company to incur further debts

THE BUSINESS JUDGEMENT RULE New defence - introduced by CLERP Not a general defence, but only available for alleged breaches of the duty of care and diligence Only applies to business judgements Preconditions good faith judgement for proper purpose no material personal interest inform oneself rationally believe that in best interests of the company What difference will it make?

DELEGATION BY THE BOARD Directors are responsible for acts of delegates except in limited circumstances eg reasonable belief that delegate would conform Delegates must be reliable and competent Similarly, directors can rely on information or advice in limited circumstances eg reasonable belief that expert was competent However, directors should not accept information or advice at face value

ONLINE ISSUES Business fundamentals are the same Disclosure obligations are the same Security and privacy consequences Board composition and management team Corporate opportunity and conflicts