Summary

  • Nominee directors on the board of a joint venture company are subject to general legal directors’ duties, including the duty to act in good faith in the best interests of the company.
  • The interaction between such general duties and the commercial desire for a nominee director to represent and protect the interests of the appointor can give rise to challenges for nominee directors, including in relation to the exercise of voting rights.
  • In addition, in the absence of a provision in the constitution or shareholders’ agreement to the contrary, generally, a nominee director must not disclose confidential information that they have obtained in their capacity as a nominee director to their appointing shareholder. 
  • In light of the above, it is very important for joint venture participants to clearly articulate their desired commercial position, including the role and obligations of nominee directors, in the joint venture documentation.

Overview

There is an increasing trend for parties to enter into joint venture arrangements to undertake commercial endeavours rather than pursuing the endeavour on their own.

One structure used to effect such arrangements, commonly described as an “incorporated joint venture”, involves participants holding shares in a company incorporated as the vehicle to pursue the joint enterprise, and appointing “nominee directors” to the board of such company to represent their interests.

A company, and the rights and obligations of directors of the company, are subject to comprehensive regulation under statute and the common law. Nominee directors of joint venture companies are equally subject to this regime. This can give rise to some challenging issues for a nominee director and add a layer of complexity to the relationship between joint venture participants as well as to the governance of the joint venture.

This article explores some of those challenges, in particular:

  • the interaction between a nominee director’s duty as a director of the joint venture company, and their duty to their appointer, and
  • the ability of a nominee director to pass on the information about the joint venture company to their appointer.

Nominee directors

The business of a company is managed by, or under the direction of, the directors. An incorporated joint venture is no different in this respect, subject to the matters which have been reserved for the shareholders in the constitution or shareholders’ agreement.

The constitution or shareholders’ agreement (or both documents) will therefore typically contain the right for each joint venture participant to nominate a certain number of directors to the board of the joint venture company, and to remove and replace a director it nominates. Such a director nominated to the board of the joint venture company is commonly referred to as a ‘nominee director’.

One of the more vexing issues in Australian corporate law relates to the nature and extent of the duties owed by a nominee director. From a commercial perspective, it is usually accepted amongst the joint venture participants that the primary role of such a director is to represent and protect the interests of the appointor. However, Australia’s corporate laws do not reflect this commercial reality.

General duties of a director

As a matter of Australian law, a nominee director is subject to the general legal duties applicable to any director of a company. This includes the duty of a director to exercise their powers and discharge their duties in good faith in the best interests of the corporation.

It is widely accepted that the content of a director’s duty to act “in the best interests of the corporation” is to act in the best interests of shareholders as a general or collective body. In the context of a joint venture, the suggestion that a nominee director should act impartially and owes his or her duties to all shareholders (not just their appointing shareholder) is, in most cases, the very antithesis of the intention of the parties when negotiating the governance arrangements for a joint venture company.

The duty of a nominee director under Australian law

There have only been a small number of judicial decisions in Australia which have considered in any detail the position of nominee directors. While the approach taken in each of them has not been consistent, the principles appear to be as follows:

  • the constitution (or shareholders’ agreement) of a joint venture company can attenuate or narrow the breadth of the fiduciary duties of a nominee director, so that such director may take into account the interests of their appointing shareholder and that to do so may be properly regarded as acting in the interest of the company as a whole,
  • if the constitution (or shareholders’ agreement) of a joint venture company does not expressly modify the nature of the fiduciary duty owed by a nominee director, it is not reprehensible for a nominee director to act in the interests of his or her appointing joint venture participant unless it can be demonstrated that the nominee director was knowingly of the view that his or her acts were not in the best interests of the company. In other words, nominee directors can act in the interests of his or her appointing joint venture participant if they have a bona fide belief that they are also acting in the best interests of the joint venture company,
  • irrespective of what the constitution (or shareholders’ agreement) says, a nominee director is not permitted to act in disregard of the interests of the company as a whole, and
  • where there is direct conflict between the interests of the company and the interests of the appointing joint venture participant, a director is, absent special circumstances, required to act in the best interest of the company (in preference to the best interest of their appointing joint venture participant).

Exercising voting rights

From a practical perspective, this issue often exercises on the mind of a nominee director in the context of voting on resolutions of the joint venture company, in particular, those resolutions which require unanimous approval and which may have a different impact on each of the joint venture participants. Can a nominee director in such a scenario vote in the interests of its appointer?

While the extent to which it represents the law in Australia is unclear, there was an interesting case decided in the late 1990s which suggested that, if the shareholders’ agreement lists a range of matters that require unanimous approval of the directors, a Court will accept that:

  • the shareholders, by agreement, have attenuated the fiduciary duties which the nominee directors owe to the joint venture company,
  • the nominee directors are free to vote in accordance with the wishes of their appointing shareholder in relation to those matters, and
  • if unanimous approval is not obtained in respect of such a matter, then the proposed matter cannot be said to be in the interests of the shareholders as a whole and, accordingly, not in the interest of the joint venture company.

Ability of a nominee director to pass on the information to their appointer

Another challenge faced by nominee directors is understanding the nature and extent of the information they are entitled to regarding the joint venture, and whether they are able to share such information with their appointer.

Directors, including nominee directors, have a statutory right of access to the financial records of the company. It would seem that the company has no discretion in this regard. In addition, as a matter of common law, directors have a right to inspect the books and records of a company and, if necessary, to take copies – this right is bestowed on directors to enable them to perform their functions and discharge their duties of office as a director.  

Directors also have a statutory right to inspect company books and records for the purposes of a legal proceeding which they are a party to, propose in good faith to bring, or have reason to believe will be brought against them.  Furthermore, the relevant company is expressly obliged to allow directors to exercise this right – in other words, there is, again, no discretion provided for.

The Corporations Act 2001 (Cth) prevents a director from, among other things, using information that they have obtained in their capacity as a director to gain an advantage for themselves or someone else or to cause detriment to the company.

However, in the absence of an express provision in the constitution or shareholders’ agreement, there is a question as to whether a nominee director can pass on confidential information gained by reason of their office as a director to their appointing shareholder if this would not result in a breach of the above mentioned statutory prohibition.

The legal position in Australia today, appears to be that, in the absence of a provision in the constitution or shareholders’ agreement to the contrary and in the absence of board consent or other special circumstances, a nominee director must not disclose confidential information that they have obtained in their capacity as a nominee director to their appointing shareholder.

Commentary

There is a palpable need for law reform in the context of the directors’ duties of nominee directors on the boards of joint venture companies and their ability to share information with their appointing shareholder. The current status of the law is most unsatisfactory – it fails to reflect the economic and commercial drivers at play in most joint venture situations.

The law should be amended to make it clear that joint venture participants can specify in the constitution of the joint venture company that, when exercising their powers, a nominee director can act in the best interests of their appointing shareholder even though it may not be in the best interests of the joint venture company.

In the absence of law reform, to seek to reduce the uncertainty, it is very important for joint venture participants to clearly articulate their desired commercial position in the joint venture documentation.