What is the rationale of the business judgment rule

Reference no: EM133063002

Question 1: Roberta is the managing director of EY Pty Ltd, a profitable company specializing in buying and selling anti-aging cosmetics and shampoos for sensitive hair. The market for EY's products is women between the ages of 40 and 70 years. While at the hairdresser's having a power perm, Roberta chats to her hairdresser, Leonardo. Leonardo asks Roberta whether her company would be interested in helping him to market a new organic hair soap called "Wonder Bar". Leonardo claims that the soap prevents male hair loss.

Roberta tells Leonardo that her company would not be interested because it sells women's products only. She offers to help Leonardo herself. Leonardo agrees. Roberta and Leonardo set up a company called Wonder Hair Soap Pty Ltd (WHS) and become its directors and members. Roberta is the majority member. The business of the company is an overnight success.

At a board meeting of EY six months later, Roberta proposes that EY enters into a long- term contract with WHS to buy supplies of the organic hair soap for re-sale. The board agrees and as part of the contract Roberta negotiates with the board that she will be paid a small commission on each sale because she drew the board's attention to this new product opportunity. EY makes large profits from selling the soap overseas.

EY now learns that Roberta is the majority member in WHS. The directors are angry and want to know what can be done.

(a) Has Roberta breached her directors duties. Which (if any) has she breached and explain how she breached has them?

(b) Should Roberta have been present at the board meeting when the contract with WHS was discussed and voted on?

(d) What statutory penalties (if any) can be imposed against her? Who can impose them?

Question 2: Growfast Pty Ltd (Growfast) operates a wholesale nursery growing and selling garden plants. Sam, Peter and Rose are the only shareholders and directors. Sam manages the company's day-to-day operations. Peter, who left school at 14 and has no tertiary qualifications, is in charge of the nursery. Rose is a non-executive director who does not take an active part in the management or operations of the company.

Until recently, Growfast has been very profitable. However, six months ago, a competing business opened nearby and since then Growfast's profits have dropped considerably. Sam thinks that Growfast should move to larger premises in a different area. Without consulting Peter or Rose he starts looking for new premises and he decides the first place he inspects is perfect, although the price is more than Growfast can comfortably afford. Sam does not think this will be a problem, because there is no competition nearby and he expects that profits will recover immediately. Same calls a board meeting and tells Peter and Rose that moving will solve all the company's problems and that this property he has seen is absolutely perfect for Growfast. He says they will have to act quickly as there is another interested purchaser. Same does not tell Peter and Rose that he only looked at this one property. He is so enthusiastic that both Peter and Rose agree to the proposal even though Rose is doubtful, feeling that they are being rushed into making a decision without being given time to consider other alternatives. Peter agrees to Sam's proposal without really understanding the financial implications.

Growfast purchases the new premises but, because of continuing dry weather, its profits remain low. Rose is becoming worried about her obligations as a director, especially if Growfast's financial position deteriorates any further.

Advise Rose about:

(i) Her position in respect of any breaches of her statutory duty of care and diligence as a director;
(ii) Whether her decision to agree to the purchase of the new premises would be protected by S.180 (2)

Question 3: What is the rationale of the business judgment rule - does it allow directors too many opportunities to avoid the consequences of poor business decisions?

Reference no: EM133063002

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