Conflicts Of Duty In Consortium-owned Entities: What Nominee Directors Need To Know

Underneath the legal machinations of Dexus Capital Investment Services Pty Ltd v Australia Pacific Airports Corporation Limited (see Lessons from Dexus v Australia Pacific Airports: confidential information and private capital sale processes) lies an interesting governance story.

What happens when a board composed substantially of nominee directors must decide whether to enforce a provision with consequences that fall unevenly on shareholders? The case did not change the law. It illustrated, with unusual factual richness, how the law operates in practice in the kind of consortium-owned, shareholder-managed company that is now standard in Australian infrastructure and private capital.

The case is on appeal. The specific findings may not survive. The governance principles will.

The structure that creates the problem

Consortium-owned companies are designed around nominee directors. The equity providers generally negotiate for board representation. They expect their nominees to understand their perspective as the providers of equity, the parties with the most to lose if things go wrong. That expectation does not override the duties of the individual directors, but it does create a structural tension. While consortium companies frequently adopt bespoke constitutional provisions intended to accommodate the practical realities of nominee director arrangements, those provisions cannot displace a director’s fundamental duty to the corporation.

Dexus is a case study in what happens when shareholder objectives diverge sharply and a board decision must be made. One shareholder was found to have disclosed the company's confidential financial model in breach of the shareholders’ agreement, including to stakeholders in parties that were in active commercial negotiations with the company. The board, composed substantially of nominees appointed by the other shareholders, resolved to confirm the default and issue a default notice. The defaulting shareholder argued that the real reason the default notice was issued was not the breach of the shareholders’ agreement but a desire by the shareholders to acquire its shares.

That argument failed. Understanding why it failed is the point of this article.

You are a director first

The legal position is not controversial. Nominee directors owe their duties to the company. They are not delegates or conduits for their appointors.

Australian courts have navigated three broad approaches to nominee director duties: treating the company's interests as absolute; treating them as primary while permitting regard to appointor interests; and permitting attenuation of the duty by shareholder agreement. The cases discussed below reflect the second and third of those approaches. 

The governing principle, affirmed in a consistent line of Australian authority, is this: the conduct of nominee directors acting in the interests of their principals is not reprehensible unless it can also be inferred that those directors would have acted the same way even if they believed their acts were not in the best interests of the company. The courts have recognised that requiring each director to approach every company problem with a completely open mind would ignore the realities of company organisation and make the position of a nominee director an impossibility. The law is not that demanding; but it is not without limits. That formulation does not weaken the duty; it describes how the duty operates in practice in a structure where the shareholders have, by agreement, adjusted its application. The breadth of the fiduciary duty can be narrowed by agreement between all the shareholders, for example by permitting directors nominated by a mortgagee to act primarily in the mortgagee's interests after default, because the constitution and mortgage arrangements together constituted that attenuation. The duty still ran to the company; the attenuation was the means by which acting in the appointor's interests could simultaneously be acting in the company's interests.

In a consortium joint venture context, a shareholders' agreement requiring unanimous board approval for major decisions attenuated the fiduciary duties of nominee directors for those specific matters, permitting them to vote in accordance with their appointors' wishes. The basis for that conclusion is specific: where unanimity is required, the company's interests on that decision cannot be determined until unanimous approval is given. Until then, a nominee who withholds consent in line with the appointor's position is not in breach, because no course of action has yet been identified as being in the company's interests. Fiduciary limitations remain. The nominee's conduct must still satisfy the test of whether an intelligent and honest person in their position could reasonably have believed their conduct was for the benefit of the company. Attenuation adjusts what counts as acting for the company's benefit on those specific matters; it does not remove that requirement, and it does not permit the nominee to prefer the appointor's interests over the company's interests on matters outside the attenuation agreement.

That said, attenuation does not permit abdication of independent judgment. The High Court has indicated that it is not open to a director to undertake to a majority shareholder to act only when the interests of the shareholder and the company coincide. Nothing in the consortium arrangements, or in the nominee arrangements between a director and their appointor, can displace the statutory duty of care and diligence.

The Corporations Act creates a safe harbour for directors of wholly-owned subsidiaries. It applies only where the constitution expressly authorises acting in the holding company's interests and the subsidiary is solvent. Consortium companies are rarely wholly-owned subsidiaries and therefore the safe harbour is unavailable.

Conflicts of interest and conflicts of duty

These are different problems and need separate treatment. A conflict of interest arises where the director, or the director's appointor, stands to gain from a board decision. A conflict of duty arises where the director feels an obligation to the appointor that pulls against the duty to the company. In consortium structures, both are common. In Dexus, both were present simultaneously: the non-Dexus directors' appointors stood to acquire shares at fair market value if the default notice was upheld. Each director maintained an ongoing relationship with their appointor.

Several directors openly acknowledged that their appointors would benefit. One agreed under cross-examination that stopping the defaulting shareholder from further use of the affiliate provisions was something he wanted to see happen. His vote still stood. The reason lay in the particular basis on which the resolution was challenged: Dexus had to establish the equivalent of fraud or bad faith on the part of those without whose participation the resolution would not have been passed. The court was not on that issue in the business of second-guessing a commercial judgment made by a properly constituted board.

Awareness of a beneficial consequence is not the same as being driven by it. Courts draw that line. Directors should know which side of it they are on. The line that cannot be crossed is this: a nominee director must not allow themselves to be compromised by looking to the interests of the group that appointed them rather than to the interests for which the board exists. Dexus illustrates in practice where that line falls.

Competition law 

A nominee director who receives competitively sensitive information in the boardroom and reports to an appointing shareholder that competes with the company may be the conduit through which information passes between competitors. That flow, even if unintentional, can give rise to risk under the concerted practices and other competition prohibitions under the Competition and Consumer Act 2010 (Cth). Australia has no formal interlock prohibition, but the ACCC has expressed concern about interlocking directorates in concentrated markets, and infrastructure is a concentrated market.

A related risk arises where a shareholder who is a competitor is acquiring or increasing a stake. A nominee director who attends board meetings or receives board papers before completion must be careful not to engage in conduct which may be seen to be putting the acquisition into effect before it is permitted to complete, as well as separate risks from premature coordination or the exchange of competitively sensitive information. Governance arrangements for incoming or increasing shareholders should address the nominee director's participation explicitly, and before the transaction is announced.

The governance architecture this article recommends reduces the competition law exposure. It does not substitute for specific competition law advice, which should be obtained before the director takes their seat.

What courts actually look for

In Dexus, the court examined each director individually. For each, the questions were the same: had the director turned their mind to the right question? Had they obtained and considered appropriate advice? Could they give a coherent and consistent account of their reasoning? Did the record show that each applied their own judgment? The non-Dexus directors came through unscathed, because they could answer yes to each. The evidence showed independent external legal advice obtained before the decision and documented deliberation. Each director had turned their mind to the competing factors and gave consistent accounts under sustained cross-examination.

What protected the directors was not the absence of competing interests, but the strength of their decision-making process.

One further point from the judgment is worth extracting. Clause 20 of the shareholders' deed required the shareholders to be just and faithful. The court held that clause 20 did not regulate the directors in resolving to confirm the default. Directors are not parties to the shareholders' deed in that capacity. When they act under the deed's default mechanism, they are bound by their statutory and equitable duties, not by the contractual obligations of the shareholders who appointed them. The two obligations are distinct. Conflating them is a common error in this kind of litigation. 

One point the case does not resolve is worth noting for directors in equivalent structures. The statutory duty of care is not uniform. It is calibrated to the corporation's circumstances - which in Dexus included a tightly-held unlisted company mid-way through a major capital works program, in active and sensitive commercial negotiations with airlines over aeronautical service agreements, holding 50-year airport leases as its core asset and governed by a shareholders' deed that imposed obligations of trust and confidence between parties managing substantial superannuation and sovereign wealth fund money.

Those circumstances set a high bar. The directors who voted to confirm the default and issue the default notice were experienced infrastructure professionals acting on detailed independent legal advice in a governance structure of considerable complexity. Had Dexus pleaded breach of directors' statutory duties - which it did not - the factual record of the company’s commercial position and the demands it placed on those directors would have been directly in play. The Court would have had to say what the duty of care required of these directors, in this company, at this moment.

It did not. But the question is live in any consortium governance dispute where a contested board decision is later challenged. Directors who understand that the standard rises with the corporation's circumstances are better placed than those who do not.

The governance architecture that provides a line of defence

1. Identify conflicts before the meeting, not during it. In consortium structures, standing conflicts should be declared at the start of a director's appointment and refreshed at each meeting where a relevant decision arises. The question is not only whether a conflict exists, but in what capacity the director is receiving information and making the decision.
    
2. The advice you receive, and in what capacity, matters. Dexus raises a point on governance frameworks that has not been addressed. 
   
   Advice from the nominator's general counsel or internal legal team should not ordinarily be treated as independent advice to the director in their capacity as a director of the company. It may be competent. But where the interests of the company and the nominator may diverge, its independence cannot simply be assumed. In Dexus, the non-Dexus directors obtained independent external advice before acting. The Dexus directors relied on internal Dexus legal advice that had an embedded conflict. The court's treatment of that difference was pointed.
   
   The capacity in which legal advice is received also determines who holds the privilege over it. Advice given to a nominee director by the appointing shareholder's lawyers may be the shareholder's privilege, not the director's. Where a decision is likely to be disputed, that question matters. It affects what can be disclosed and to whom if litigation follows. This is not settled law; it is a question the case raises and governance frameworks have not yet answered. Directors and company secretaries in consortium structures should be alert to it.
   
   Where a decision will produce consequences that fall unevenly on shareholders, the board needs structurally independent advice.
    
3. Information received from the nominator is not freely usable at the board table. A nominee director may receive information from their appointor in confidence: strategic positions, internal assessments, commercial intentions that bear on a board decision. The duty to disclose material information to the board sits in tension with any confidentiality obligation owed to the nominator. This tension is common in consortium structures and rarely addressed in governance frameworks. The discipline is to be clear about what information you hold, in what capacity and what your obligations are before the meeting starts.
   
   A board cannot as a matter of general law unilaterally withhold information from a nominee director. That protection is only reliably available where the nominee has agreed in advance - through the constitution, the shareholders' agreement or a board protocol - to defined information controls. The governance architecture needs to be built before the conflict arises.
    
4. The record must show that each director applied their own judgment. Minutes that record only the resolution prove nothing useful if the decision is later attacked. The record should show what each director considered, what advice was received, what the competing factors were, and that each director formed their own view. In Dexus, each director gave individual evidence of their reasoning. The minutes and their attachments listed the advice received and the sessions attended. That record was what the cross-examination tested, across eleven days of hearing, and it held.
    
5. Recusal is not always the answer. In a small nominee board, excluding conflicted directors may make a valid resolution impossible. The question is whether the director can form and articulate a genuine view directed to the company's interests. If yes, that may support their participation, subject to the constitution, the Corporations Act and the particular nature of the conflict. If not, abstention or exclusion should be considered and the reason documented. Recusal policies designed for listed companies do not translate to tightly-held consortium structures.

A note for trust structures

Many infrastructure and private capital assets in Australia are held through trust structures. The governance question for directors of a corporate trustee is different from that facing a nominee director of an ordinary company; the law is less settled.

The more common model is a corporate trustee of an unregistered unit trust. In that structure, the directors owe their duties to the trustee company under the general law and the Corporations Act and face personal exposure. The trustee, as a separate matter, owes duties to unitholders in equity. Whether those two sets of obligations interact to impose any direct duty on the directors toward unitholders is a question Australian courts have not yet directly answered. 

The prevailing position is that directors do not owe independent duties directly to third parties by reason of their position alone. Exposure to beneficiaries runs through the accessory liability pathway: knowing assistance in the trustee company's breach of trust. Where directors of the trustee are themselves concerned in the breach, they are liable to the same standard of care expected of the company itself. Without a dishonest or fraudulent design, directors will not usually be personally liable for the way the trustee company deals with trust property.

Where the trustee is a responsible entity of a registered managed investment scheme, the statutory framework adds an overlay that changes the analysis. In addition to its obligations under the Corporations Act and the scheme constitution, the RE owes fiduciary obligations to members under general law. The scope of that fiduciary obligation supplements rather than displaces the statutory framework. The Corporations Act imposes on officers of the RE a direct statutory duty to act in the best interests of members and, where a conflict arises between members' interests and the interests of the RE itself, to give priority to members' interests. The definition of "officer" extends beyond formally appointed directors; any individual who falls within it is subject to that same duty.

The better view is that courts are likely to hold that a higher standard applies to directors of professional trustees, like responsible entities, that hold themselves out as having special knowledge, skill and experience, and which, directly or indirectly, invite reliance by members of the public. While that proposition is not settled conclusively, it is the prudent framing for directors of an RE in a governance dispute.

As a practical matter, directors of a corporate trustee, whether of an unregistered unit trust or a registered scheme, must be able to distinguish at any moment between their own interests, their company's interests and the interests of the beneficiaries or members of the fund. In a consortium governance or restructuring context, those three sets of interests will not always point in the same direction. Knowing which obligation prevails, and being able to show the board applied the right one, is the discipline the law demands.

Whether the conflict framework for directors of a corporate trustee is more demanding than that applicable to nominee directors of an ordinary company is a question the law has yet to answer directly. That issue remains for another day. The more immediate point is that it is a question directors should be asking before the board meeting begins, not after it ends.

Conclusion

The nominee director's dilemma in consortium structures is not going away. Infrastructure and private capital investment will continue to produce boards composed substantially of shareholder nominees making decisions whose outcomes fall unevenly on their appointors.

The law does not ask nominee directors to be free of competing interests or relationships. It asks them to act in the company's interests despite those pressures and to be able to show they did. The best protection is governance architecture built in advance. 

This article is published without footnotes to maximise readability for a governance audience. A fully footnoted version, including citations to all cases and secondary materials referred to, is available on request from the authors.