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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Meridian Textiles Ltd, an Indian company, has a director, Mr Rao, who is also a major shareholder. He votes at a board meeting to approve a contract with a firm in which he secretly holds a large stake, and he does not tell the board. Which duty has Mr Rao most clearly breached?

Mr Rao breached the fiduciary duty to avoid, or properly disclose, a conflict of interest. He hid his personal stake in the counterparty and still voted on the contract, putting his own interest ahead of the company's. Directors have no duty to guarantee profits or pay yearly dividends.

  1. AThe duty to avoid or properly disclose a conflict of interestCorrect
  2. BThe duty to pay dividends every year
  3. CThe duty to obtain shareholder approval for every board decision
  4. DThe duty to guarantee the company's profits
  5. The duty to act only on the advice of the auditors

Explanation

Directors owe a fiduciary duty to avoid conflicts between their personal interests and those of the company, or to disclose them. Mr Rao concealed his stake and voted, so he breached this duty. The other options describe obligations that directors do not have.

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