Composition of group boards

Board composition means the makeup of the board. The composition of the board must be set-up properly to maximise the effectiveness of the group structure.

Each company within the corporate group is a separate legal entity and requires its own board. A company’s board composition varies depending on whether the company is the holding company, an operating or holding subsidiary or a joint venture company.

Suitable members of the board need to be chosen carefully to:

• • manage each entity separately;
• • ensure that decisions are made in the best interests of that entity; and
• • limit the liability of that entity in respect of other entities within the group.

Board members of wholly owned subsidiaries are usually drawn from the holding company's executive and the most senior executives in the group are responsible for business conducted by the subsidiary.

See Composition of group boards.

Shadow/de facto directors and officers

The benefits of corporate structuring include risk management and asset protection. The separation of companies within the group may be "ignored" in certain circumstances.

A holding company may be considered a director of the subsidiary where:

• • the holding company acts in the position of a director; or
• • where the directors of the subsidiary are accustomed to acting in accordance with the instructions or wishes of the holding company.

Where a holding company is considered a director of the subsidiary, it would owe the same duties to the subsidiary as those directors who were formally appointed to the board of the subsidiary.

See Shadow/de facto directors and officers.

Cross guarantees

External parties dealing with a corporate group member may require guarantees or letters of comfort from a subsidiary's holding company, other corporate group members or the entity's director.

If a company (usually the holding company) gives a guarantee in respect of another company (usually the subsidiary), the holding company may then be liable to the external creditors of the subsidiary in the event of default. A deed of cross guarantee makes each group company who is a party to the deed liable to the external creditors of each other company in the event of company default. Creditors may also require personal guarantees to be given by the directors of the company with which the creditors have contracted.

Letters of comfort are given by holding companies to an external party who requires a written expression of the holding company's ongoing financial support for the subsidiary. Generally, letters of comfort are not enforceable undertakings but can be legally binding depending on the terms and circumstances of the letter and the companies involved.

See Cross guarantees.

Corporate structure and directors' duties

It is typical for some of the directors to be directors of different companies of the corporate group. For example, some directors of the holding company may also be appointed as directors of the subsidiaries. Holding several directorships across different companies within the group may give rise to various dilemmas such as:

• • how to manage overlapping or conflicting interests within the company (including where interests as directors and interests as shareholders diverge) and between various entities within the corporate group (one of which may be their appointor);
• • which entity the directors should act in the best interest of; and
• • what the directors must do to fulfil their duties to each company of which they are directors.

A director of a wholly owned subsidiary is taken to have acted in the best interests of that subsidiary where that director acts in the best interests of the holding company. This must be expressly authorised in the subsidiary company’s constitution and the subsidiary company is not, and does not become, insolvent because of that act. This is only available to directors of wholly owned subsidiaries.

Shadow directorship has implications both for the holding and subsidiary company. The holding company may be held liable for the subsidiary's actions where the subsidiary is found to have engaged in insolvent trading. The subsidiary company who acted in accordance with the holding company's instructions or wishes risk breaching their duty not to allow their discretion to be fettered.

Even where the holding company is not taken to be a director of the subsidiary and the subsidiary is not insolvent, a holding company may still be held liable for the subsidiary's actions where the directors of the holding company delegate their powers to the subsidiary. The subsidiary would be taken to be acting as the agent of the holding company.

See Corporate structure and directors' duties.

Maintaining an effective corporate structure

An effective corporate structure hinges on the independence and integrity of the decision-making process and the prevention of conflicts of interest. It requires:

• • providing directors with training in conflict of interests management;
• • meetings between and within corporate group members to be properly recorded;
• • third party interactions must clearly indicate which corporate group member the third party is interacting with; and
• • where necessary, separate company meetings should be held.

See Maintaining an effective corporate structure.