Management of a corporation is usually conferred upon the directors acting collectively. However, an individual director may often get involved in particular matters outside the context of a board...

Running Head: RESEARCH ASSIGNMENT
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Research Assignment
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Research Assignment
Introduction
Good corporate governance largely depends on the management unit within an organization. Corporations’ management is usually based upon collective actions undertaken by directors. Good corporate governance principles demands directors to scrutinize and actively participate in matters discussed at any board meeting. Directors are required not to depend on opinions of others, rather depend on independently contents and opinions regarding an organization in question and measure the accuracy of the outcomes.
However, despite these measures, an individual director may be involved, on several occasions, in certain matters that fall outside any formal delegation and the context of a board meeting. To some extent, management of a given corporation may be based upon opinions and decisions of a particular director, commonly refe
ed to as shadow director.
The corporations Act 2001 include principles such as the duty of directors’ care and diligence, and the duty of good faith. These two duties are applicable in the context of directors’ actions. This discourse examines the managerial aspect of corporations with respect to decision-making processes and actions of directors. In its analysis, the paper looks at two variables, the directors’ duties of care and diligence, and the concept of a shadow director. To support the analysis of these factors, legal principles and relevant issue (case law) are outlined. The discourse begins by outlining the research of the study, where a
oad review of primary law sources such as case law, and legislation is made. Further, the discourse makes an analysis of the relevant information gathered from research work. Basing on analysis done, a convincing and concise legal argument is presented, which leads to conclusion making.
Research
The Directors’ Duties of Care and Diligence
Case Laws Concerned with the Duty of Directors’ Care and Diligence
Some of the recent case law that relate to the duty of directors’ care and diligence discussed include ASIC v John David Rich (the One.Tel case), and ASIC v Fortescue Metals Group Ltd.
These case laws have been conducted by the Australian Security and Investment Commission (ASIC).
Australian Securities and Investments Commission (ASIC) v John David Rich (the One.Tel case), 2009
One.Tel was one of publicly held companies in Australia with subsidiaries in major business areas in Hong Kong, United Kingdom and four European countries. The company was established in 1995 by Brand Keeling and Jodee Rich. Its high profile investors included Lachlan Murdoch and James Packer who were board members. Before doom downed on the corporation, it was ranked in the fourth position among Australia’s largest telecommunication companies.
Jodee Rich and his board members continued to pay themselves bonuses that summed up to multi-million dollars until the company collapsed in 2001. The company’s collapse negatively affected Murdoch and Packer. They both lost their family companies NewsCorp and PBL, in which loss totalled to around a billion dollars.
According to Section 180 of the 2001 Corporations Act, officers or directors of an organisation must discharge their duties and exercise powers with diligence and concern as any normal person should exercise.
Thus, in 2001, ASIC initiated litigation against some of the board of directors of One.Tel. Precisely, ASIC sought relief against Mark Silbermann, the financial director, and Jodee Rich, the director and CEO of the organization. In its allegations, ASIC claimed that Silbermann and Rich
eached their legal duty of care and diligence by denying the board the exact financial position of the organization for months. Additionally, Murdoch and Packer alleged that the two directors had profoundly misled them. With respect to the duty of directors’ care and diligence, a director is required to exercise his or her powers and discharge duties with a degree of care and diligence that a logical person would exercise if is a director of an organization holding the same responsibilities and subjected under similar circumstances. Basing on these regulations, ASIC centred its allegations under the financial position of One.Tel, which, according to information given by the board, had worse depictions in terms of cash flow, debtors, creditors, liquidity, and earnings. AISC held that Silbermann and Rich, as primary directors, had full information of the economic position of the corporation but failed to disclose co
ect facts to the board.
When the underlying financial details of the company were investigated, the court ruled out ASIC’s claims about the poor financial position, asserting that they were unconvincing. The inability of ASIC to demonstrate the wanting financial status of the company resulted to no charges imposed on the two directors because of
each of legal duty of care and diligence.
ASIC v Fortescue Metals Group Ltd, 2012
Fortescue Metals Group (FMG) Ltd is a publicly held corporation with Andrew Fo
est as its CEO and Chairman. In 2004, in its mission to export iron ore, FMG had plans to establish a mine is the Western parts of Australia, and a railway to run from the mine to the port. To pursue this mission, a feasibility study was commissioned by FMG. The entire project was based upon the feasibility study, in which it was established that FMG had sufficient finances needed for the completion of the project. FMG made public statements claiming that it had implemented binding agreements with three Chinese companies, in which each one was to build and finance the project.
ASIC claimed that FMG had no reasonable or genuine basis for makings the disclosures since the Chinese companies were not lawfully bound to fund the project. ASIC alleged that FMG was involved in a course of deliberate and knowing conduct to have the notifications made publicly, which were false. ASIC declared dishonest of FMG, and its board of directors, precisely Andrew Fo
est. In its claims, ASIC asserted that Fo
est, as a director, had infringed the duty of care and diligence by failing to see to it that FMG complied with obligations outlined in the disclosure and did not undertake deceptive or misleading conduct.
In examining the case, Justice Gilmour, one of the judges of the Federal Court of Australia, established that Fo
est did not violate his duty of care and diligence. The court ruled out that Fo
est, in his position as a managing director, was accountable largely for the whole board’s performance. The court asserted that a managing director or a CEO of any given corporation might, at reasonable circumstances, expected to hold more information availed to him or her and required to act more diligently than other members of the board did. According to Sect 190(2a) of the 2001 Corporations Act states that a director cannot be held accountable if he or she delegated power to members of the board on reasonable grounds as stipulated under sect 198D.
The court therefore, was contented by the fact that Fo
est truly believed that the agreements signed between the organization and Chinese companies were lawfully binding and this belief was honestly and reasonably held by him together with the entire board.
The board claimed that Fo
est together with the board did not seek to make deceptions in making statements concerning the legality of the Chinese contracts. Besides, the court established that Huston, the company’s in-house legal advisor, advised the board on the legality of the Chinese contracts, a fact that made...