Directors Duty to Act in Good Faith and for a Proper Purpose

Company Directors have a duty under s 181 of the Corporations Act (2001)
to act in good faith and in the best interests of the company.

The duty to act in good faith generally means to act in the best interests of the shareholders, but not necessarily the stakeholders such as employees or creditors.

To determine whether a company director has acted for a proper purpose, the courts will examine the reason a particular power exists and then consider if the director acted to achieve this purpose. For example, the power to issue shares exists to enable the company directors to raise capital but not to dilute shareholdings. In Howard Smith Ltd v Ampol Petroleum Ltd share were issued to a company in the process of executing a takeover, but the company issuing the shares did not require capital.

The duty to act for a proper purpose goes to the heart of the fiduciary relationship company directors have with shareholders. Company directors are entrusted to further the enterprise on behalf of shareholders, and are not entitled to enrich themselves from the largess of the company they are there to serve.

Groups such as the Australian Shareholders Association have formed voting blocks to vote down resolutions at Annual General Meetings where shareholder value has been threatened by the actions of directors.

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