Seminar on Director’s Duties and Liabilities Issues …bakermckenzie.co.jp/material/dl/seminar/emi/2-1.pdf©2007 Baker & McKenzie 2 Table of contents 1. Case Study – Hollinger

Ean Mac Pherson 13 April 2007Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (Gaikokuho Joint Enterprise) is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly,reference to an “office” means an office of any such law firm.

Seminar on Director’s Duties and Liabilities Issues for Japanese companies investing overseas

©2007 Baker & McKenzie 2

Table of contents1. Case Study – Hollinger International2. What is a Fiduciary Duty?3. Who are the Directors?4. Who do the Directors owe duties to?5. What are the main Duties?6. Nominee Directors7. Criminal Penalties8. Listed Company Issues


Case study - Hollinger International

• Global media company• Owner of London Daily

Telegraph & Chicago Sun Times• Conrad Black – Chairman, CEO &

Shareholder• Listed on New York Stock Exchange


Hollinger International Inc.

(Delaware Company listed on New York Stock Exchange)

Hollinger Inc.(Listed on Toronto Stock Exchange)

20% + B Class Voting Shares

RavelstonCorporation

70%

The Hollinger Structure Conrad Black

65%

Project Companies A B C D Buyer

Sale of Business

CEO - Conrad Black

CEO - Conrad Black

Non Competition Payment

Non Competition Payment

Non Competition PaymentCEO - Conrad Black


Conrad Black’s Jet Trips

Cost $565,326


The Allegations

US District Court Case alleging Conrad Black breached his Fiduciary duties to Hollinger International, including:

• Duty of loyalty• Duty to maximize transaction benefits to Hollinger• Duty to refrain from acting to Hollinger’s detriment• Duty to disclose Related Party Transactions• Duty to refrain from making false or fraudulently

misleading statements


The Penalties

If convicted Mr Black may face:• Imprisonment• Fines• Forfeiture of his property


Japanese Companies’ Perspective

Directors appointed by Japanese Companies unlikely to need to make decisions about private jet tripsbutSuch Directors may have to balance and/or choose between competing interests relating to their position as Directors


Common Issues for Japanese appointed Directors

1. Problems in 100% owned overseas subsidiaries of Japanese Companies

2. Problems in Joint Venture Companies


Comparison of Director duties in different countries

Directors must report to board or shareholders meeting if they intend to transact with the Company

Directors have a duty of loyalty (i.e. to operate the Company without regard for personal interests)

Directors’ duties and personal interest must not conflict with those of the Company

Directors must not have conflicts between their own interests and Company’s interests

Directors must not seize corporate opportunities for themselves

Director must not take part in transactions that are in competition with the Company

Directors must not misuse position for own benefit

Directors must perform their duties faithfully for the benefit of the Company

Directors have a duty of care to the Company

Directors must apply the diligence of a careful businessman

Directors must act honestly and with care and diligence

JapanUnited States(Delaware)

Thailand (Private Company)

Australia


What is a Fiduciary Duty? (忠実義務)

• Duty to act with loyalty and trust to the other person

• Duty to put the interests of the other person above the fiduciary’s own interests

• The duty arises when you are in a position of special trust or power over another person


Examples of Fiduciary Relationships

• Trustee/Beneficiary• Partner/Partner• Lawyer/Client• Agent/Principal• Doctor/Patient• Director/Company


Who are the Directors?• Executive/Non-executive Directors• Alternate Directors• Shadow Directors• Generally no distinction between full

time and part time Directors


To whom are Director duties owed?

• Directors owe their obligations to the Company• The “Company” means the shareholders (and

sometimes future shareholders) • Directors do not owe fiduciary duties to

employees or to society at large• Generally no duty to creditors but their interests

should be considered (especially if Company is near insolvency)


Specific Director Duties

• Duty to act honestly• Duty to act with care and diligence• Duty to avoid insolvent trading• Duty not to misuse position of Director• Duty to avoid conflicts of interest• Duty to act in accordance with Articles of

Association


Duty to Act Honestly

Directors must act:• (a) in good faith and (b) for a proper

purpose• in what they consider to be the bona fide

best interests of the Company• honestly in dealings with shareholders

and must not mislead shareholders


Duty to Act with Care and Diligence• Directors must give reasonable attention to the affairs of the

Company but they can delegate their duties to appropriate officers of the Company

• Directors must take reasonable steps to be in a position to guide and monitor the management of the Company

• Directors should attend all Directors’ meetings and be aware of Company’s overall financial situation


Business Judgment Rule (e.g. Delaware, Australia)

In Australia, Directors will satisfy duty of care and diligence if they:– exercise their judgment in good faith for a proper purpose– do not have a material personal interest in the transaction– inform themselves of the subject matter of the decision to the

extent they reasonably believe appropriate– rationally believe the judgment to be in the best interests of the

Company


Duty to avoid Insolvent Trading

• Company insolvency will affect employees, creditors, suppliers, customers etc

• Directors must sign off on accounts that the Company is solvent

• If the Company becomes insolvent, Directors have a duty to cease trading and put the Company into administration or liquidation

• Potential criminal liability for insolvent trading


Duty not to misuse position of Director

• Hollinger Case – Directors alleged to misuse position for personal gain

• Duty not to misuse position to obtain a private benefit for yourself or your related party to the detriment of the Company

• Duty not to make improper use of information


Duty to avoid conflicts of interest

• Duty generally requires interested Directors to step aside and let remainder of board decide the issue

• Duty is to inform the board and usually to step aside, does not generally require you to stop the Company entering into a contract with your related Company even if the deal advantages your related Company

• Some jurisdictions require you to notify the Company of your related parties on becoming a Director


Nominee Directors

Q. To what extent can a Director take into account the interests of his appointing shareholder?

A. Generally Director may take into account the interests of his appointing shareholder if:

- he honestly believes those interests are consistent with the interests of the Company as a whole

- such belief is not unreasonable


Nominee Directors

• Shareholders Agreement and Articles also relevant (e.g. may show Company is a vehicle for the joint venture, that shareholders will cause Directors to give effect to Shareholders Agreement etc)

• Japan Abrasive Materials Pty Ltd & Ors v. Australian Fused Materials Pty Ltd & Ors [1998] WASC 60 (Directors not acting for improper purpose)


Criminal Penalties

• Director can face criminal penalties (fine/imprisonment) for breach of Director duties (usually when fraud is involved)

• Other laws:- Health & safety laws - Environment laws- Private criminal actions (e.g. Thailand TPI case)


Listed Company Issues

• Insider trading (esp. on share sell down)• Continuous disclosure (market

announcements)• Share sale or purchase notifications• Shareholder approval for related party

transactions


Other Issues

• Immigration (Thailand work permits)• Residency (minimum no. of resident

Directors) • Filing requirements

Documents

Seminar on Director’s Duties and Liabilities Issues …bakermckenzie.co.jp/material/dl/seminar/emi/2-1.pdf©2007 Baker & McKenzie 2 Table of contents 1. Case Study – Hollinger