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I am forming a small company with a few others (in Australia).

I can elect to be a director if I wish, or merely a shareholder. In either case, the shares will be evenly distributed between us.
I will be involved in the day-to-day operation of the business.

I know the general principles of acting as a director in a company, and am familiar with the rights of shareholders. In the last ten years or so, I believe Australia has introduced legislation that strongly punishes those directors who do not act in a professional or prudent manner. While I will of course attempt to fulfill the duties required - I am new to conducting business at this level, and am concerned about mistakenly breaching some unknown rule/law and being subject to repercussions that I just don't know about.

What are the benefits and pitfalls of being a director instead of just a shareholder?
I am interested primarily in legal consequences or rights/responsibilities, but anything that could sway my decision would be useful.

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    Director - you will have day to day knowledge about the operations in your firm. Shareholder - Wait for the year end report or if the other directors share information with you. Your pick. – DumbCoder Mar 12 '14 at 12:31
  • @DumbCoder why is it not an answer? – littleadv Mar 12 '14 at 22:48
  • @littleadv - I don't have anything else to add, other than the two lines and moderators will probably remove it and put it as a comment. – DumbCoder Mar 13 '14 at 11:17
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I don't know Australian law, but I will give my US perspective here. The custom in the US is for officers and directors to be indemnified by the corporation, and that LLCs have an even broader power to indemnify (even to remove the duty of loyalty!). Moreover, directors will typically be able to purchase D&O insurance to protect them from loss in the event of liability.

For US corporations (not LLCs), the duty of care (prudence) requires that directors behave responsibly in weighing major decisions, and consult experts and specialists before coming to rash decisions. It usually becomes a court case in the context of a large public company in the midst of an acquisition event. The only people with standing (in the US) are shareholders. If all the other shareholders are directors, then it may be hard for them to blame you.

Additionally, if you are concerned about the propriety of your actions, there may be sources to rely on. First, discussion with your fellow directors can be a helpful guide (though will not usually immunize you from any accusation of wrongdoing), and disclosure tends to cure almost any accusation of breaching the duty of loyalty. Second, boards often secure the advice of legal counsel, and sometimes bring on lawyers as members or will outright hire counsel for the board. Third, there may be services that will provide you with generic advice (e.g. UK Companies House and US-based IOD), which might set you at ease a little bit.

I don't know the details of Australian law, as I say. But my sense of common law countries is that, like the US, they are primarily concerned about negligence (incompetently or imprudently neglecting to understand the business and make informed decisions), disloyalty (fraudulently engaging in self-interested transactions that either hurt the company or should have been offered to the company), and recklessness (not bothering to seek out information). As long as you are active, informed, engaged, and not engaging in secret deals outside the company (especially deals where either side is competing with the company), then that would be more than sufficient under the US standard.

If you are concerned about liability, then inquire into indemnifications by the company (in the US, the company can usually pay all legal costs of directors), insurance, and legal counsel. I imagine your business partners are no more savvy than you are. My impression is you are overreacting to relatively rare and exotic expression of corporate law (at least in the US).

But I'll close by repeating that I don't know Australian corporate law.

  • Interesting comments, thanks. I know what to look for now. – DefenestrationDay Apr 7 '14 at 16:12
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I know the general principles of acting as a director in a company, and am familiar with the rights of shareholders. In the last ten years or so, I believe Australia has introduced legislation that strongly punishes those directors who do not act in a professional or prudent manner. While I will of course attempt to fulfill the duties required - I am new to conducting business at this level, and am concerned about mistakenly breaching some unknown rule/law and being subject to repercussions that I just don't know about.

As you have already stated, the key to being director in a company is the additional responsibility. Legally you can be held in breach. At the same time you will be able to influence your decision much better if you a director and thus safeguard your interest.

If you are only a shareholder, you cannot be held responsible for decision by company, individual malpractice may still be applicable, but this is less of a risk. However over a period of time, the board can take certain decision that may marginalize your holding in the company.

  • Note that it's not unambiguously clear that shareholders have no duties. Some state rules, particularly for close corporations, impose an effective duty of loyalty on controlling shareholders. This usually manifests as an obligation to make a major event or opportunity (like a buy-out) available to the smaller shareholders on equal terms. It's not a universal rule in the US. Not sure re Australia. apps.americanbar.org/buslaw/newsletter/0011/materials/… – NL7 Apr 7 '14 at 15:12

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