ACCT3031 Chap.2 Corporate Law, Companies and Governance Structures
Corporate Law, Companies and Governance Structures
Company law provides the floor on which governance is built. This chapter explains the company as a separate legal entity with limited liability, sets out the five statutory duties of directors under the Corporations Act 2001, and works through the business judgment rule in s180(2) and how it differs from the Delaware presumption.
It closes with governance codes, comply or explain, the ASX if not, why not approach and the main international codes. Expect to use the distinction between legal minimum and best practice in every report, because it explains why a company can be fully compliant and still weakly governed.
What this chapter covers
- 01
Separate legal entity and limited liability
- 02
Law versus governance
- 03
Statutory and general law duties of directors
- 04
The business judgment rule
- 05
Related-party benefits under Chapter 2E
- 06
Governance codes and if not, why not
Worked example · free
Can a director rely on the business judgment rule here?
- +1Name the claim: an alleged breach of care and diligence under s180(1).
- +1Test good faith, purpose and interest: nothing suggests an improper purpose and she has no material personal interest.
- +1Test information and belief: she read the papers and asked questions, supporting an informed and rational belief.
- +1Conclude that protection is likely, because the rule judges the process rather than the outcome.
Key terms
- Limited liability
- The rule that shareholders are generally liable for a company's debts only up to the amount they invested.
- Officer
- Under s9, a director, company secretary or person who takes part in decisions affecting a substantial part of the business or its financial standing.
- Related party
- A director, close family member or controlled entity whose financial benefits from a public company generally need shareholder approval under Chapter 2E.
- Comply or explain
- A code approach, used in the United Kingdom, in which companies either follow a provision or explain the alternative they adopted.
- Fiduciary duty
- A duty of loyalty that requires a director to avoid conflicts and make no unauthorised profit from the position.
Corporate Law, Companies and Governance Structures FAQ
Why do directors owe their duties to the company rather than to shareholders?
Because the company is a separate legal entity, it owns its assets, owes its debts and has interests of its own. Directors act for that entity, so their duties run to the company. Best interests usually means shareholders as a whole, but the courts recognise that creditors' interests matter when a company approaches insolvency.
How does the Australian business judgment rule differ from Delaware?
In Australia the rule is a statutory safe harbour, so directors must show that they meet the four conditions in s180(2). In Delaware it is a judicial presumption that a plaintiff must rebut. Both aim to stop courts judging commercial decisions with hindsight, but the Australian design places more weight on documenting the decision process.
Is departing from an ASX recommendation a breach of the law?
No. The ASX Principles are a code, not legislation, and the if not, why not approach allows a company to depart from a recommendation provided it explains why. A departure is not automatically poor governance; what matters is whether the explanation shows how the governance objective behind the recommendation is still met.
What happens if a director breaches a statutory duty?
Most duties are civil penalty provisions aimed at accountability rather than punishment. Courts can impose pecuniary penalties, order compensation and disqualify a person from managing companies, in serious cases permanently. Where a breach is dishonest, intentional or fraudulent it becomes a criminal offence that can carry fines or imprisonment.
What did Salomon v Salomon decide?
The House of Lords held in 1897 that a properly incorporated company is a legal person separate from its owners. That principle explains why a company can own property, contract, sue and be sued in its own name, and why its directors owe their duties to the company rather than to individual shareholders.
Assessment move
Learn the five duties with their section numbers, then practise the business judgment rule as a four-step test on short scenarios. For codes, compare one recommendation, such as an independent chair, across the ASX, UK and US approaches, and practise judging whether a company's explanation for a departure is adequate.
When you meet a case, write one sentence naming the duty in play and one naming the condition that decides it, then check your reasoning against the section.
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