Jim, Mark and Liang are the sole directors of Red Sharks Pty Ltd. (RSPL). RSPL are the main supplier of netball uniforms, shoes and sports equipment for all Netball Clubs in Australia.
For years RSPL has contracted with a number of freight companies to transport their goods throughout Australia. Last month the Board of Directors decided to purchase their own freight company. The Board believed in the long run,that this would save RSPL hundreds of thousands of dollars.
Three weeks ago the Board decided they would make a takeover bid for Drive Hard Freight Ltd (DHFL). A few days before they started buying shares in the company(thus a few days before anybody but the Board knew of the takeover),Jim told his brother of the upcoming takeover. Both brothers knew this would cause the share price of DHFL to increase dramatically, so Jim’s brother bought $200,000 worth of shares. Jim’s brother made over $400,000profit. This also meant that RSPL purchased the freight company at a price of about $275,000 more than they would have paid if Jim had not informed his brother of the takeover.
A month later, ASIC receive information that Jim told his brother of the takeover before the information was released to the public. Advise ASIC of any possible breaches of directors duties Jim may have made.
Answer:
Issue:
Is Jim in breach of his director’s duties under common law and the corporation Act2001 (Cth)?
Law:
Legislation:The Corporations Act 2001 (Cth) CA
S9- definition of officer
S181- duty of good faith
S182- improper use of position
S183- improper use of information
SS1042, 1043- improper use of information (inside trading)
Common Law:
Asic v Adle (2002) –Director must exercise good faith/ Misuse of position/ Misuse of information
Asic v Vizard (2005) –Misuse of information (not essential given that the Adler case does cover this)
R v Hannes (2002) / R v Rivkin (2004) – insider training
Application:
S9 of the CA definesan officer of a company is a person who is a director or secretary of a company. In fact, Jim is one of the sole directors of Red Sharks Pty Ltd. (RSPL) whichis the main supplier of netball uniforms, shoes and sports equipment for all Netball Clubs in Australia so clearly Jim is an officer of the company.
S181 states that Directors/officers of a corporation must exercise their powers and discharge their duties in good faith (in the best interest of the corporation) and for a proper purpose (Asic v Adle, 2002).In fact that Jim told his brother of the upcoming takeover of the DHSL so Jim’s brother bought $200,000 worth of shares and made over $400,000 profit. This also meant that RSPL purchased the freight company at a price of about $275,000 more than they would have paid if Jim had not informed his brother of the takeover. He is clearly not acting in the best interests of the RSPL nor for a proper pupose.
S182 states that a director, secretary, other officer or employee of a corporation must not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the corporationFurthermore, based on S183, a director of a corporate must not improperly use the information. In fact, Jim who is a director of RSPL has received the informationabout upcoming takeover because of his position. He has used that information for his brother’s advantage (benefit)so his brother made over $400,000 profit.This also meant that RSPL purchased the freight company at a price of about $275,000 more than they would have paid if Jim had not informed his brother of the takeover (detriment to the corporation).Jim uses his position and information improperly, it causesdetriment to the corporation. Asic v Vizard (2005) which is about duty not to misuse information and Asic v Adle (2002) which is about director must exercise good faith/ Misuse of position/ Misuse of information
The term insider trading refers to transactions in shares of publicly held corporations by persons with inside or advance information on which the trading is based ss1042 and ss1043. Jim told his brother of the takeover before the information was released to the public. In the fact,it could be breach of directors duties Jim may have made.This fact can be supported byR vHannes (2002) and R vRivkin (2004).
Conclusion:
On the balance of probability, the court is likely to apply ss181-183 for breach of duty of good faith and for misusing information and his position and find that Jim has breachedhis directors duties and liable for insider trading.
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