On 3 March 2012 I posted that the Full Federal Court had handed down its significant decision in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6. I provided an overview of the facts of the case, and  a cataglogue of the important legal issues upon which the Full Federal Court pronounced. My post can be read here and the judgment can be read here.

I now return to this case to post the first of a series of instalments of my closer review and analysis of the judgment of their Honours Finn, Stone and Perram JJ.  Each instalment will address one sizeable legal issue from the judgment. Today’s addresses the first of these – de facto directors and officers. I do not propose to repeat my overview of the facts of the case here, so please check my earlier post to review the facts as found.

The judgment is long, and even its treatment of this one issue stretches to 116 paragraphs. I have drawn from it the two most helpful aspects of the judgment. Both are lists – one of law, one of fact. The first is their Honours’ useful distillation of principles from the authorities. The second list is of 11 factual matters, or activity by Mr Grimaldi, which were considered relevant to the finding that he was a de facto director of Chameleon. The latter can be useful to gain a pragmatic understanding of what conduct can be enough to amount to acting as a de facto director for a company, subject to the circumstances.

First, however, is an introductory overview.

De Facto Directors or Officers – The Law [28-76]

Section 9 of the Corporations Act 2001 (Cth) is the definitions provision of the Act. It defines the term “director” to include (a) someone who is appointed a director or alternate director, and (b) certain persons who are not. Those embraced by the definition of “director” under (b) are those people who are sometimes referred to as “de facto directors” and “shadow directors”, though those terms are not used in the provision. De facto directors  under (b)(i) are those who, while not validly appointed as directors, act in the position of director. Shadow directors under (b)(ii) are also not validly appointed as directors, but the directors of the company are accustomed to acting in accordance with their instructions or wishes.

The trial judge Jacobson J had found that Mr Grimaldi was a de facto director of Chameleon for the purposes of s 9(b)(i) of the Corporations Act 2001 (Cth)’s definition of “director” (see [28]). His Honour did not therefore need to consider whether Grimaldi was a shadow director within the s 9(b)(ii) definition of a director, or was an “officer” within the s 9(b)(i) and (ii) definition of that term. On appeal, Chameleon argued that even if the Full Court found Grimaldi not to be a de facto director, then he was an “officer” and liable thereby.

The Full Federal Court gave close and detailed consideration to these issues, comparing the Corporations Act provisions with UK legislation, and tracing through the historical development of the law on this issue in Australia. They observed that the definitions of “director” and “officer” in the legislation has enlarged the class of persons concerned in the management and affairs of a corporation, who may be treated as a de facto director, with all the  duties and potential liabilities that that entails [34] (but, I interpose to add, probably without the same D&O insurance coverage in place).

Their Honours also observed that in the UK there is not one single decisive test of when a person will be found to be a de facto director and judges have, for the most part, cautioned against attempting to formulate one. The UK cases equally demonstrate that generalisations in this area can often require subsequent qualification [60]. Their Honours appear to suggest at [59] that the same is true in Australia (the expression they use about this and another “lesson” derived from their review of the UK cases is that these “for the most part are confirmatory of what is immanent in our own jurisprudence”).

I suggest that the cases show that it is often a difficult line to draw, and whether a person is a de facto or a shadow director will, in each case, be a question of fact and degree largely to be determined by the circumstances and facts of the particular case, subject to the following.

Their Honours provide (from [63]) a most useful distillation of principles drawn from the authorities. They enumerate ten principles. The first eight are principles their Honours consider to have emerged from the wording of the definitions in context and from Australian case law, as to when a person will be a de facto director under s 9 “director” (b)(i) – that is, a person who is not validly appointed as such but “acts in the position of a director”. The ninth and tenth relate to the s 9 definition of “officer”. For the authorities their Honours cite in relation to each principle, I refer you to the judgment at the paragraph references I provide below.

Principles re De Facto Directors –

(i) A person may be a director even without any purported or previous appointment of that person to that position at any time. The definition applies as much to a person who is a true usurper of the functions of a director in a company, as to a person who takes “an active part in directing the affairs of [a] company” with the acquiescence of the appointed directors [64];

(ii) The formula “acts in the position of a director” contemplates that in some degree at least the person concerned, though not appointed a director, has been “doing the work of a director” in that company. Or, put another way, the person has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances [65];

(iii) The roles and functions so performed will vary with the commercial context, operations and governance structure (to the extent it is operative) of the company. Their performance by that person may well be at variance with what is permitted by the Act or by the company’s constitution. Nonethless, whether they suffice in the circumstances to constitute the person a “director” for the Act’s purposes will often be a question of degree having regard to “the nature of the functions or powers which are exercised and the extent of their exercise” [66];

(iv) There is no reason why the relationship of a person with a company may not evolve over time into that of a de facto director. It also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time [67];

(v) Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company. The fact that a person has been designated a “consultant” for the performance of functions for a company will not as of course mean that person cannot be found to be a director. It will turn on the nature and extent of the functions to be performed and the constraints imposed thereon. Their Honours did not need to determine the question, but said they considered that if a consultant is a corporation and what it does through its own directors or officers results in “acting in the position of a director” then, and consistently with the policy of s 201B (which requires a director to be a natural person), it will be a question of fact as to which director (or officer) in the consultant company is (or are) the de facto director/s of the corporation [68].

In this case, Chameleon entered into a range of consultancy arrangements. Grimaldi made submissions that he was a consultant himself, further or alternatively that Chameleon Ventures (CV) – the company of director Roberts of which Grimaldi also became a director – was hired as Chameleon’s consultant to perform a number of tasks, and CV in turn called on Grimaldi to do that work. None of which, so Grimaldi contended, makes him a de facto director. However, even if those submissions might have held good, the evidence did not bear them out. Grimaldi did not become a director of CV until after much of the key dealings took place. There were other problems with the evidentiary material for Grimaldi. Their Honours observed that even if the evidence established that everything Grimaldi did for Chameleon he did through CV (Chameleon Ventures) – which it did not – what he did was to act in the position of a director of Chameleon. As mentioned above, s 201B(1) of the Act does not permit Chameleon Ventures to be used as a screen to avoid that conclusion. In any case, while the trial judge did appear to accept that Grimaldi acted in his own right as a consultant for Chameleon for the limited purposes identified in Board minutes… he also conducted a wider range of activities for Chameleon. The Full Court approved of the trial judge’s observation that the description of Grimaldi as a consultant did not necessarily inform the conclusion as to whether he was a director  [136-140];

(vi) Though the point seems not to have been authoritatively settled in Australia, their Honours agreed with the proposition that, with the extension of the de facto director concept to persons who have never purportedly been appointed director, a rigid distinction between a de facto and a shadow director cannot be maintained. Their Honours also considered that, like a shadow director whose wishes or instructions need not relate to all facets of the management of the company’s business, the functions assumed by a de facto director likewise may be limited in their scope. Nonetheless, there will commonly be the need to determine “how much a person must do before it can be held that such person is occupying or acting in the position of a director” [69];

(vii) This is a “substance over form” point. It can be misleading to say, as has commonly been said in both Australian and English cases, that to be a de facto director one must be shown to have assumed or performed functions which only a de jure director or board can properly perform. This is because when it comes to managing the business of the company – which in a typical “Table A” type company is entrusted to the directors (see Art 73) – a priori classification of what is or isn’t a proper function of a director has no general utility. In a range of cases a company’s business may be managed by the board, under the board, by directors individually, by delegates, by some combination of these, by senior managers, by executive committees, etc. In other corporate settings, the work of an appointed director may be simply selective and strategic action. In the end, what is being asked for is the making of a value judgment about the proper characterisation of what in its context the person in question had been doing [70];

(viii) Proof that a person exercises senior management functions, while ordinarily “a necessary condition of acting as a director” will not necessarily be a sufficient condition to qualifying as a de facto director (emphasis added). This is because the definition of “officer” includes a person (s 9(b)(i)) who, though not a director, “makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation” and (s 9(b)(ii)) “who has the capacity to affect significantly the corporation’s financial standing”. In many cases, of which this was one, the application of ss 180-183 to a “director or officer” can eliminate the need to differentiate between a de facto director and an officer (de facto or not) who is not a director, although this contrasts sharply with the situation in the UK [71];

Principles re Officers –

(ix) There was no need to decide whether the reach of ss 180-183 to “officers” had been altered by the repeal of the earlier definition of “executive officer”, although their Honours sounded doubtful as to whether it had been so altered. However they emphasised several points with regards to the s 9 definition of “officer”. First, that in their view, while the definition does not explicitly refer to someone acting in an “office”, that is implicit in it, and is made explicit in other provisions of the Act, eg s 180(1). That said, a person who otherwise satisfies either of the requirements in (b)(i) or (ii) of the definition is likely as a rule to be acting in an office (or position) of the corporation for the purposes of the Act irrespective of whether he or she has been formally appointed – “ie the person can be a de facto officer” – or engaged as a consultant. There is no reason in principle to differentiate between directors and s 9 officers in either of these regards. To do so would be contrary to the clearly manifest purpose of the legislation to extend the Act’s duties and liabilities to persons whose functions and/or capacities within a corporation extend to those described in (b)(i) and (ii) of the definition [72]; and

(x) The requirement in (b)(i) of the s 9 definition of “officer” – that a person makes, or participates in making decisions that affect the whole or a substantial part of the business of the corporation – does not mean that that person does so as one “in ultimate control”, or that the decision-makers are not subject to the direction and control of the board. Likewise, the requirement in (b)(ii) of the “officer” definition – that a person has the capacity to affect significantly the corporation’s financial standing – refers to the character properly to be attributed to that person’s capacity in the circumstances. It may arise from the extent of that person’s participation in investment decisions or financial commitments made, from the dimensions of a decision or decisions, from the nature of that person’s participation in the control and direction of the affairs of the corporation. The question again is one of fact [73].

Their Honours then added observations on “three additional matters”, for which I will continue the roman numerals as for the previous principles their Honours distilled.

Three Further Principles re de facto directors – 

(xi) The fact that a company has active directors aside from the alleged de facto director, or has a properly constituted and apparently functioning board, does not preclude a finding that the person in question was a “director” [74].

Indeed in this case, the Full Court applied that principle here. They accepted that Chameleon had a properly constituted board, the board had minuted meetings from time to time at which decisions were taken, it had two executive directors who dealt with aspects of the company’s business. The board members seemed only to have allowed Grimaldi’s attendance at board meetings by invitation, and did not appear to regard him as a director as such. However, while they did not hold him out as a director eo nomine, they clearly authorised him on occasion to perform functions such as would lead a reasonable third party dealing with him to believe he was acting as a director of Chameleon (see the instances enumerated below). The significant deals he negotiated showed he stood on an equal footing with the directors in directing the affairs of the company. More generally, Grimaldi was allowed either to perform functions such as fund raising and share placements, or to arrogate to himself functions in which either or both executive directors at the least acquiesced with knowledge. Grimaldi was a resourceful and experienced person, and the extent of his participation and intrusion into Chameleon’s affairs could hardly have gone unnoticed, and indeed his skills and activities were known and utilised. One executive director even referred to Grimaldi in a letter as a “pseudo director” [132-135].

(xii) Whether the company itself has held the person out as a director will itself be a relevant, though not decisive, consideration. Similarly, in their Honours’ view, perceptions of those dealing with the company can be of some contextual evidentiary significance, especially where those perceptions were independently formed, reasonable in the circumstances, and support the appearance that the person was acting “under colour of office” [75].

Applying that here, their Honours observed that the trial judge properly used evidence of the perception of others as of contextual evidentiary significance in arriving at the characterisation of Grimaldi as a de facto director. One example was the trial judge’s observation that the most telling evidence that Grimaldi was reasonably perceived by outsiders to have acted as a director or officer of Chameleon was to be found in a letter from Chameleon’s auditors that Grimaldi was their main source of information and, although not a director, appeared to them to be “the manager of the company” [130-131].

(xiii) Their Honours made passing reference to the position of company secretaries: They have record-keeping responsibilities and a growing list of statutory duties, mainly to do with ensuring compliance with prescribed formalities. Traditionally the position was regarded as a humble one with little authority attached to it; however it has evolved over time to become that of the chief administrative officer of a corporation, and its “natural mouthpiece”. While it is now the case that a company secretary has authority to enter into contracts for the purposes of a corporation’s administration, it remains the case that, without the board’s authorisation, the secretary has no authority to participate in the management of the company’s affairs [76].

Application of the Law to This Case – The 11 “Matters” Relevant to the issue of De Facto Directors or Officers [77-144]

Their Honours reviewed each of the 11 “discrete matters” in almost all of which the trial judge had held the actions of Grimaldi were those of a director of Chameleon (from [90]). While it is clear that it will vary from case to case as to when a particular individual crosses the line and is held to be a de facto director, it is instructive to have regard to the facts of this case and what was regarded as relevant conduct here, to gain an understanding of what can be held to be sufficient. Here, the relevant conduct included –

(1) Negotiating for Chameleon to acquire some Fijian mining interests. The board gave Grimaldi unconstrained authority to negotiate a contract of high significance to Chameleon, including as to form and amount of consideration, and prepare the draft purchase agreements. Their Honours agreed with the trial judge that in the circumstances Grimaldi was being entrusted with the work of a director of Chameleon. That he could not formally bind the company did not detract from the significance of what he was authorised to do. In any event, his actions would be consistent with those of an “officer” under (b)(i) and probably (b)(ii) of the Act’s s 9 definition. [90-92]

(2) Preparing the Chameleon Prospectus. Chameleon engaged director Roberts’ company Chameleon Ventures to do it, and it in turn handed the task to Grimaldi. The trial judge held there was nothing to suggest Grimaldi’s functions were limited to the overall planning and verification process to be expected of a professional advisor. The accepted evidence was that Grimaldi decided the contents of the prospectus and dealt with external service providers including registries, sponsoring brokers, vendors and valuers. Their Honours held that it was open to the trial judge to find that Grimaldi’s function went beyond that of an “assistant” and involved performing a function to be expected of a director, vis a vis the prospectus. It was equally open to infer he was acting in reality for Chameleon, and had been doing director’s work for it in this matter. In any event, their Honours again concluded that his function was consistent with that of an “officer” of Chameleon for s 9(b)(i) purposes. [93-96]

(3) Raising capital for Chameleon. After listing, Grimaldi advised director Roberts that the next task was to find investors to raise capital and achieve the minimum spread of shareholders required by the ASX, and Grimaldi and Roberts set about doing that. In this regard, Grimaldi argued that his involvement was as a director of Murchison – which had assumed a contractual obligation to assist Chameleon with fundraising. Their Honours rejected this and his other arguments, and held that Grimaldi (and Roberts) conducted the capital raising for Chameleon as directors of Chameleon. [97-104]

(4) Appointing a representative of investor Zenith Development Co Ltd to the board of Chameleon, and (5) Corresponding with Prider. Grimaldi wrote to a law firm related to and representing Zenith, which said: “…we believe…it would be a good idea for Zenith to have a representative on the board of (Chameleon)…I will organise a directors resolution to approve your appointment.” The firm also wrote to Grimaldi, addressed to “Phillip Grimaldi, Chameleon Mining NL”. On appeal, Grimaldi argued that he had been appointed a director of Roberts’ company Chameleon Ventures (CV); CV had been appointed a consultant to Chameleon to provide “company secretarial duties”; hence Grimaldi was acting either for CV discharging its secretarial duties, or under the direction of the Chameleon board. The Full Federal Court rejected that. As to the first argument, Grimaldi was not appointed a director of CV until (just) after these events. As to the second, while the board was involved and passed resolutions about Grimaldi and Roberts meeting with Zenith officers regarding further funding, it was properly open to the trial judge to consider that Grimaldi’s participation in the process was such as to be expected of a person acting in the position of a director. His letter about the appointment to the board was not merely a company secretarial act. It evidenced Grimaldi’s role for Chameleon in this dealing with Zenith, as a director. [105-111]

A second matter emerged from a dealing between Tembo Gold Holdings Pty Ltd (a wholly owned subsidiary of Chameleon of which Grimaldi was a director), Zenith, and Chameleon. I will not review the detail of it here, but Zenith relied upon the dealing to refuse to pay $3million owed to Chameleon. Grimaldi was closely involved in meetings and correspondence to seek to resolve the problem. He also wrote an “internal memo” to Chameleon director Barnes, in which he gave advice and made strategic recommendations about the problem, about Chameleon’s position and liquidity, and about its relations with Murchison. It concluded with a remark by Grimaldi to the effect that if Zenith cannot be made to pay, Murchison could make a takeover bid for Chameleon, delist the company, and “we” could then sort out the Zenith problem. The Full Federal Court agreed with the trial judge that this with other actions he took, indicated Grimaldi “made high level management decisions on matters that affected Chameleon’s financial standing”. Their Honours held that the memo indicates the depth of Grimaldi’s participation in directing and influencing the affairs of Chameleon. They also agreed with the trial judge’s conclusion in relation to these dealings, that Grimaldi had the practical direction of those dealings on the balance of probabilities, and this was sufficient to make him a de facto director in those dealings, although their Honours disagreed that Grimaldi acted as a de facto director for all purposes or that he alone had the practical direction of them. This was partly because in the Tembo Gold-Zenith transaction, Grimaldi for some purposes at least acted on behalf of Tembo Gold. [112-116]

A third matter emerging from these dealings was that Grimaldi had written to Prider (of Zenith), cc’d to two Chameleon directors – saying he had spoken to them, “directors of Chameleon”, and then referred to their opinion, using the collective pronoun “we”. The trial judge found that this showed Grimaldi carrying out management tasks ordinarily performed by a director or senior officer of a company. The Full Court agreed. [117-18]

(6) Advising Mr Mclennan. McLennan’s company had sued Chameleon, and Grimaldi wrote to MrLennan about it. Grimaldi wrote indicating he had met with Barnes (a Chameleon director) and advised McLennan to withdraw his action and negotiate. Their Honours considered the letter revealed conduct appropriate to be taken by a director. [119-121]

(7) Contriving the March 2004 Share Placement. Grimaldi advised director Roberts about this, and identified the entities to whom shares would be issued and the number of shares each was to receive. Their Honours agreed with the trial judge that Grimaldi exercised functions which would ordinarily be exercised by a director. They also noted that the placement itself displayed a practice of preferential treatment. [122]

(8) Involvement in the Cadetta Transaction. Their Honours discuss this transaction in detail later in their judgment, but agreed with the trial judge that Grimaldi’s involvement in negotiating the transaction on behalf of Chameleon meant that he owed fiduciary duties to the company, whether or not he was a director or a fiduciary. [123]

(9) Involvement in the Cerro Negro Copper Mine Acquisition. The accepted evidence showed that Grimaldi negotiated the acquisition of this mine in Chile on behalf of Chameleon and made all the decisions on Chameleon’s strategy. Their Honours held that this was a good indicator that, in this company and in the circumstance under which it operated, Grimaldi was acting in the position of a director. They rejected Grimaldi’s argument that he was negotiating under the control of the board, even though the share issue agreed upon required board action and shareholder approval. [124-125]

(10) Involvement in the ASX Announcement of the July Share Placement; and (11) Involvement in the Proposed Further Share Placement. Grimaldi drafted the ASX announcement, procured its lodgment with the ASX, and received and banked the proceeds of the placement. As to the proposed further share placement, Grimaldi suggested it, indicated the number of shares that should be issued, to whom, and in what numbers. This involve the doing of acts which properly could be done by a person acting in the position of a director, so held the Full Court. In their setting, they supported the trial judge’s de facto director conclusion. [126-128]

Conclusions of the Full Federal Court re Grimaldi as a De Facto Director and Officer

1. Even though not authorised to be a director, Grimaldi was either given, or arrogated to himself with the acquiescence of at least the two executive directors, functions in the affairs of Chameleon which would properly be expected to be performed by a director of that company given its circumstances. Given the extent and significance of those functions, he so acted in the position of a director as to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director. The trial judge committed no appellable error in his conclusion. [141]

2. Their Honours paused to note that while some of the these acts of Grimaldi were done at the request or with the authorisation of the board, others were not. Grimaldi took action at times without request and on his own initiative. This is important for later in the judgment, in determining the scope of the “subject matter over which his fiduciary obligations to Chameleon extend”. [142]

3.  While their Honours focussed upon whether Grimaldi was a director, as that is how the case was run and as the trial judge had concluded, they remarked that that question was in a sense a distraction. They emphasised that the evidence also demonstrably brought him within the definition of “officer” for s 9(b)(i) and (ii) purposes. Their Honours pointed out that that finding, which is far less complex an enquiry than that of de facto director, was all that Chameleon needed for the purposes of this case [143].