To implement an effective corporate structure, consideration must be given to the composition of boards within a corporate group. Each entity within the group requires its own board and different considerations apply depending on whether the structuring of the board is for the holding company, an operating or holding subsidiary or a joint venture company.

Board composition means the makeup of the board, and may comprise of executive and non-executive directors and independent and non-independent directors. Typically, board members of wholly owned subsidiaries are drawn from the holding company’s executive and the most senior executives in the group who are responsible for business conducted by that subsidiary.

It is important to structure the composition of the board properly to maximise the effectiveness of the group structure and to minimise the chances of that structure being undermined. As each company within the corporate group is a separate legal entity, suitable members of the board need to be chosen carefully to manage each entity separately, to ensure that decisions are made in the best interests of that entity and to limit the liability of that entity in respect of other entities within the group.

See Composition of group boards.

Notwithstanding the effectiveness and benefits of corporate structuring for risk management and asset protection, there may be circumstances which result in the separation of companies within the group being “ignored”, such as where a holding company is taken to be a director of the subsidiary, or where the holding company is held liable for the actions of the subsidiary. This has implications for the directors of companies within the group, as well as the holding company and the subsidiaries themselves.

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 directors’ duties to the subsidiary as those directors who were formally appointed to the board of the subsidiary.

See Shadow/de facto directors and officers.

To manage the risks of trading with a corporate group member, often external parties will 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 with which the creditors have contracted, in the event that the subsidiary defaults. 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 with which the creditors have contracted, in the event that such company defaults. Further, creditors may require personal guarantees to be given by the directors of the company with which the creditors have contracted.

Letters of comfort are usually given by a holding company in circumstances where an external party requires a written expression of the holding company’s ongoing financial support for the subsidiary. Generally, letters of comfort are not enforceable undertakings. However, depending on the terms and circumstances of the letter and the companies involved, they may be found to be legally binding.

See Cross guarantees.

In the context of a corporate group, it is typical for some of the directors to have common directorships, such that a number of the directors of the holding company are also appointed as directors of the subsidiaries. However, where there are common directorships, the directors may face various dilemmas when exercising their powers or fulfilling their duties as directors such as:

• how to manage overlapping or conflicting interests within the company (including where their interests as directors and their 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 the wholly owned subsidiary where that director acts in the best interests of the holding company, provided that the subsidiary’s constitution expressly authorises the director to do so and the subsidiary is not, and does not become, insolvent because of that act. However, this provision is only available to directors of wholly owned subsidiaries and only goes some way towards addressing the potential conflicts of interests that may arise within a corporate group.

The concept of shadow directorship has implications not only for the holding company, but also for the subsidiary concerned. As the subsidiary would have acted in accordance with the holding company’s instructions or wishes (in order for the holding company to be taken to be a director), there is also a risk that directors of the subsidiary may be in breach of their duty not to allow their discretion to be fettered.

Even where a holding company is not considered a director of the subsidiary, it may nevertheless be held liable for the subsidiary’s actions where the subsidiary is found to have engaged in insolvent trading.

Even in circumstances where a 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. In those circumstances, the subsidiary could be taken to be the agent of the holding company.

See Corporate structure and directors’ duties.

To prevent an effective corporate structure from being undermined, the independence and integrity of the decision-making process and the prevention of conflicts of interest are of paramount importance.

Within corporate groups, board members and officers may place the interests of the group or other members of the corporate group above that of the entity that they are employed or appointed as director by. To maintain an effective corporate structure, directors need to be provided with appropriate training in conflicts of interest management, meetings between and within corporate group members need 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.