When can a shareholder benefit from the actions of a delinquent director?
The case of Abeles v PA (Holdings) Pty Ltd ((2000) 18 ACLC 867) is a fascinating one which illustrates that a breach of directors' duties can sometimes benefit the relevant director's closest relatives in a situation where the relative is unaware of the allegations of breach that may be successfully pursued against the director. The situation is one which probably can only arise in a closely held company; but the implications for other companies may be significant depending on how the facts are structured. The facts are taken from the CCH law report of the case. An agreement was reached between PA (Holdings) Pty Ltd (the company) and KA Abeles (the vendor) under which the company agreed to purchase 100 shares held by the vendor in another company, Miro Holdings Pty Ltd (Miro), for $1.7 million. The vendor was the widow of the late Sir Peter Abeles who had been a director of the company (referred to as the director). The director had been intent upon securing for his wife $1.7 million, which was stated in the director's will as forming part of the "ample provision" he made for her during his lifetime. A clause in the director's will stated that he had caused the company to acquire the vendor's shares at an "inflated price". Furthermore, it was the director's intention that the payment to some extent would have removed the need for the vendor to deal with the director's first wife and her family after the director's death.
The evidence established that the subject shares were valued at either $1.55 million or $100 (or less), depending upon the different approaches to valuation. The company alleged that by entering into the agreement the director had:
• breached his statutory duty of care and diligence under section 232(4) (see now section 180 of the Corporations Law); and
• breached his statutory duty not to gain a benefit for another person by making improper use of his position under section 232(6) (see now section 182 of the Corporations Law); and
• failed to act in good faith for the benefit of the company as a whole; and
• failed to avoid an actual or potential conflict of duty and interest.
The company asserted that, in causing it to enter into the agreement, the director had treated the company as if it was his own so as to confer advantages on his wife. The company further asserted that, in order to establish a breach of duty by the director, it was not required to establish that the purchase price was at a gross overvalue or any overvalue at all. The vendor argued that the issue was not whether the consideration for the shares was vastly in excess of their value but whether the director did not act in the interests of the company in entering into the agreement. The vendor submitted that, if the transaction was for the benefit of the company, it did not matter that as a result of the agreement the vendor obtained the financial benefit and the advantage of not having to deal with the director's first wife and her family. The vendor further argued that a real benefit to the company was that it would have achieved control of Miro (ie if the share sale agreement was completed, the company's interest in Miro would have increased from 45.05 to 90.09 percent), and that this benefit alone was enough to defeat the claim that the director acted in breach of his fiduciary duty. The company also asserted that the vendor was knowingly concerned, or intentionally participated, in the director's breach of fiduciary duty. It was not contested that the vendor knew that the transaction involved the company agreeing to purchase the vendor's shares and that the director of the company caused the company to agree to purchase the vendor's shares. Nor was it contested that the director wanted to ensure payment to the vendor for her shares in Miro in circumstances which would have avoided dispute between the vendor and the director's first wife.
The vendor sought an order from the court for specific performance of the share sale agreement. The company sought an order setting aside the agreement. To determine whether the director was in breach of a duty to act for a proper purpose, it was argued proof of whether the deceased director's purpose for procuring the sale of the shares of the vendor in Miro was objective. Alternatively, the case could be determined in favour of the director if it could be established that his aim was to ensure that his duties to the company were being formed properly. Bergin J noted: "This is to be objectively determined, although evidence of subjective intentions or beliefs is relevant. The Court must determine whether, but for the alleged improper or collateral purpose, the deceased would have caused the defendant [company] to enter into the [relevant agreement]." (at para 42) Bergin J also held that the deceased director treated the defendant company as if it were his own. His aim was to confer advantages both on himself and on the vendor.
His honour agreed with the proposition that the sale price was probably at an overvalue. After reviewing all the evidence Justice Bergin noted: "I am satisfied that the [director's] substantial purpose in causing the defendant to enter into the agreement was to make financial provision for his wife after his death . . . "I am satisfied that but for the desire to provide for the [vendor] after his death in these circumstances the [director] would not have caused the defendant to enter into the agreement. ... I am satisfied that the defendant has established a breach of duty." (at paras 57-59 inclusive) Having established that the director was in breach of his duty, was his widow able to rely on the contract, or was she aware of the breach which would have made her an accessory to the breach? The court was satisfied that she was not aware of the director's intention. Bergin J noted that: "the apparent complexity of the structure of and relationships between the [director's] companies, the [director's] business acumen, the [director's] habit of keeping business matters to himself and the circumstances in which this transaction came about with the involvement [of his solicitors], [did not] in my view, alert the [vendor] and would not justify imputing such [knowledge or alertness] to the likelihood of impropriety.
I am not satisfied that [the vendor] knew, or that such knowledge should be imputed to [her] that the deceased was improperly exercising his function as a director or that he was acting improperly." (at para 111-112) In all the circumstances, although the judge held that the director had acted improperly, and in breach of certain duties etc, his widow, who was the beneficiary from this alleged impropriety, should not suffer. Whether the decision will be appealed or not, it raises some interesting questions on the position of a shareholder/beneficiary who relies on certain action being taken on his or her behalf and does not inquire as to the merits or otherwise of certain transactions.
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