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When is a director’s interest a "material personal interest"?

Directors need to be constantly mindful of when their personal interests might conflict with their duties as a director.  Deciding when a personal interest is material and needs to be considered often involves careful judgement on the part of a director.  A recent case provides some useful guidance on this issue.

The Corporations Act 2001 includes a number of provisions that require directors to disclose material personal interests.  In particular, section 191 of the Corporations Act requires a director to disclose any material personal interest to the board.  Section 195 then excludes a director of a public company from being present or voting on a matter that relates to a material personal interest (unless an exception to section 195 applies).

The difficulty for directors is that "material personal interest" is not defined in the Corporations Act and few cases have considered the scope of the term. 

The recent case of Grand Enterprises Pty Ltd v Aurium Resources Ltd [2009] FCA 513 considered the meaning of "material personal interest" in sections 191 and 195 and provides some insight into how broad a meaning courts are likely to attribute to the term.

The relevant facts in the case were as follows:

  • Aurium Resources Ltd and Greater Pacific Gold Limited were renegotiating a joint venture agreement which included an issue of 35 million shares in Aurium to Greater Pacific.
  • The share issue required Aurium shareholder approval.
  • At the Aurium board meeting to approve the notice of meeting and explanatory memorandum to shareholders, three directors - Mr Remta, Mr Quinn and Mr Benson - declared interests and ceased their participation in the discussion.
  • Mr Remta declared an interest due to being a director and chairman of both Aurium and Greater Pacific.
  • Mr Quinn and Mr Benson declared an interest due to their direct and indirect shareholdings in Aurium and Greater Pacific.
  • Mr Quinn’s and Mr Benson’s declarations of interest were not referred to in the explanatory memorandum for the shareholders meeting.

Grand Enterprises Pty Ltd, an Aurium shareholder, took legal action to try to prevent Aurium acting on the resulting shareholders resolution to issue shares to Greater Pacific.  Grand Enterprises claimed that the explanatory memorandum failed to disclose all declarations of interest and that the directors did not withdraw from the directors meeting in sufficient time.

The court did not regard Mr Remta’s potentially conflicting duties as a director of both Aurium and Greater Pacific as amounting to a “personal” interest.  The court was of the view it would only have amounted to a “personal” interest if Mr Remta was to receive remuneration, other benefits or other incentives from the proposed transaction.

The court also reached the view that, even if the small holdings of Mr Quinn and Mr Benson in Aurium and Greater Pacific amounted to a “personal interest”, they were not of sufficient size to be regarded as "material".

While the case does not provide definitive guidance on what amounts to a "material personal interest", the following key points can be drawn from it:

  • Where a director has a personal interest that may affect decisions they make as a director, they need to carefully consider whether the interest is material.
  • A personal interest will only be "material" where it has the capacity to influence a director's consideration of, and vote on, a particular matter.
  • While courts are likely to take a commercially pragmatic approach in deciding whether a matter constitutes a "material personal interest", they will look closely at the issue if a personal interest is clearly present.

If directors are in doubt in this area, they should err on the side of caution.

Please contact Geoff Green on 03 8319 1866 or at geoff.green@bsglegal.com.au or Jai Singh on 03 8319 1872 or at jai.singh@bsglegal.com.au for further information.



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