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Lydia is an executive for a multinational company; she is also director of a joint venture (JV) company owned by her employer (30%) and two other shareholders (each with 35%). The board is comprised of Lydia and a representative of each of the other shareholders. Lydia is chairman. The others defer to her because she has governance training and works for a large corporation; they are both from small businesses.
Lydia’s employer supplies equipment to the JV. The JV resells that equipment. A shareholders agreement governs the way in which the board acts. It states, very clearly, that decisions must be made in the best interests of the JV and not in the interests of any one of the shareholders. All decisions must be unanimous.
Lydia’s boss has asked her to persuade the board to sign a contract that would be very advantageous to her employer. She knows that this contract is uncommercial and that the JV could get far better terms from an unrelated party. It is, in effect, a transfer of profits from the joint venture to the multinational company. She is aware of her duty to the JV and unwilling to put the resolution for fear of breaching her duties.
Lydia’s boss has made it clear that her job depends on getting the contract signed. He has no board experience or training and believes that the chairman should be able to instruct the others to do her bidding.
How would you advise Lydia?
Whatever Lydia decides, she would be aware that she represents the minority shareholding in the company. Poor performance of the JV will hurt the majority shareholders and should act as a wake-up call, especially if they see the minority shareholder profiting at their expense. If she gets the board to sign the contract, Lydia opens herself up to being accused of breaching most of her duties by promoting a related party transaction to the detriment of the JV. Lydia could quite easily find herself the recipient of a civil lawsuit and under scrutiny of the regulator for possible criminal action.
Fortunately, Lydia has a very simple way out. She needs to explain to her boss, possibly backed by a legal opinion, that putting the contract to the board has quite serious ramifications and that her boss would also be liable as they would be considered to be a person involved in a contravention under Section 79 of the Corporations Act. Furthermore, Lydia should point out that by acting on her boss' instructions, her boss would effectively be considered a director of the company under the definition of director in Section 9 of the Corporations Act. As a result Lydia's boss could be personally held liable in any civil or criminal proceedings.
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