Tutorial 1 - Week 2
1. Discuss the events leading up to the enactment of the “Bubble Act” in the United
Kingdom in 1720. What was the legislation designed to achieve? Ultimately what
further legislation followed and why?
South Sea Bubble: shares rose 10 times in value in a few days which was way
beyond its true value. And then the price of shares crashed led to economic
instability and loss of investor confidence.
Bubble Act 1720 was passed by British Parliament to ban joint stock companies.
Finally, Joint Stock Companied Registration and Regulation Act 1844 was passed
because other types of joint enterprises were formed using contracts and trust to
avoid Bubble Act 1720, which allows private companies to be recognized.
2. Butch runs a rubbish removal business. In December 2015 he decides to form a
company to take over the business. He and his son, Butch Jnr, are the shareholders
and directors. Butch controls the company and does not involve his son in
anything but the rubbish removals. Butch sells his business to the company at an
inflated price and lends the company $50,000 to help meet the cost of purchase.
As security for the loan, Butch arranges a mortgage over a vacant block of land
which he transferred to the company as part of the business sale.
In the first year of operation, the business makes a small profit (after paying both
Butch and Butch Jnr’s wages) but by the beginning of 2017 it is clear that it
cannot compete with the “Dial-a Bin” franchise that has recently opened up in the
area.
Butch becomes desperate and works so hard at saving the company that he suffers
a nervous breakdown and is hospitalized for several weeks. His efforts are all in
vain, however, as the company is forced into liquidation. On realization of the
assets, it is found that the company has approximately $60,000 to go towards
meeting creditors’ claims of $90,000.
(a) If Butch is the only secured creditor, will he get his $50,000 back?
(b) Can Butch claim workers’ compensation, assuming that he is otherwise entitled to
it? （工伤？）
(a) If Butch is the only secured creditor, he will have priority over unsecured creditors
in the distribution of the company's assets. The vacant block of land over which Butch
has arranged a mortgage will be sold, and the proceeds will be used to repay his loan
of $50,000. However, if the sale of the property does not realize enough to repay the
loan in full, Butch will be entitled to claim the balance as an unsecured creditor in the
liquidation.
(b) Butch may be entitled to workers' compensation if his nervous breakdown was
caused by his work for the company. However, this will depend on the specific
circumstances of the case and the applicable laws and regulations. If Butch is entitled
to workers' compensation, he can claim it from the relevant authority or insurance
provider, regardless of the liquidation of the company. However, any compensation
payments he receives will not be treated as a priority debt in the liquidation and will
be subject to distribution with other unsecured claims.
3. Discuss what led to the referral of power from the States and the Northern Territory
to the Commonwealth in 2001. Is this a permanent solution?
States referred power to Commonwealth under s51(xxxvii) of the Constitution.
Section 51(xxxvii) grants power regarding:
matters referred to the Parliament of the Commonwealth by the Parliament or
Parliaments of any State or States, but so that the law shall extend only to States by
whose Parliaments the matter is referred, or which afterwards adopt the law.
The referral of power from the States and the Northern Territory to the
Commonwealth in 2001 was a response to a crisis in the management of Australia's
water resources, particularly in the Murray-Darling Basin. The basin, which covers
one-seventh of the Australian landmass and spans four states and the Northern
Territory, had suffered from severe overuse and environmental degradation, resulting
in a decline in the health of the river system and its ecosystems.
The crisis reached a critical point in the early 2000s, with the Murray-Darling Basin
Commission (MDBA) struggling to manage the competing demands of agriculture,
urban water supply, and environmental conservation. The states and territories had
failed to coordinate their efforts to address the issues, leading to calls for a national
approach to water management.
In response, the Australian Government initiated the National Water Initiative (NWI)
in 2004, which aimed to provide a framework for the sustainable and efficient use of
water resources across the country. As part of the NWI, the Commonwealth
government gained powers to regulate and manage the water resources of the MurrayDarling Basin, including the power to issue water licenses and regulate water use.
The referral of power was intended to provide a more coordinated and integrated
approach to water management in the basin and to ensure that the environmental,
social, and economic needs of the region were balanced. It was also seen to improve
the efficiency of water use and to address the sustainability challenges facing the
basin.
Whether the referral of power from the States and the Northern Territory to the
Commonwealth is a permanent solution is difficult to predict. It is worth noting that
water management is a complex and politically sensitive issue, and the interests of
different stakeholders can sometimes be in conflict. The effectiveness of the NWI and
the Commonwealth's management of the Murray-Darling Basin will depend on the
ongoing cooperation of the states and territories and the ability of the government to
balance competing interests and priorities. As such, the future of water management
in the basin will likely depend on ongoing cooperation and negotiation between the
Commonwealth and the states and territories.
7057 Tutorial 2 week3
Problem set 1
1. AMGL is a public company. Its shares are listed for quotation on the ASX. What
does it mean to say that a company is listed? Are all public companies listed on the
ASX?
It is eligible to trade its stocks to public. No there are still some unlisted public
companies. Only 2000 Australian companies are listed. All listed companies are
public companies.
Members of the public can buy and sell securities such as shares issued by the
company on the secondary market conducted by the ASX. Separate entity itself. List
for raising capital. Public companies have wider power to raise capital from the
members of the public that proprietary company.
2. SAFPL is a proprietary company. What is the difference between a public and a
proprietary company? Is the size and scale of SAFPL’s operations typical of
Australian proprietary companies?
Only 1 director is required, whereas public companies require 3. Proprietary
companies don’t have to hold an AGM. The procedure of passing resolutions in a
proprietary company is informal and it can be done without a meeting. Certain
restrictions on appointment and removal of director’s apply only to public companies.
Directors of public companies must be individually voted onto the board, unless by
unanimous agreement of General Meeting. Directors of public companies must be
able to be removed by resolution of shareholders in general meeting. Directors of
proprietary companies can be present at board meeting and vote on matter in which he
is interested subject to disclosure of interest.
SA has more directors.
Public can IPO to raise money, Pty can not ask for public to invest.
In 1981, SAFPL may be typical of AUS Pty, given that it’s a small family owned
business. However it is fair to say that the scale has grown beyond the typical aus Pty.
4. JJ Investments Pty Ltd has only one shareholder, Jason, who is also its only
director. Is this allowed? How do the principles in Salomon’s case apply to a
company like JJ Investments?
Yes, only one director is required by S201A (2).
More information is needed on JJ’s situation. Private or company asset? Is Jason a
secured creditor? But there is only one shareholder, no other shareholders would be
possibly involved in insolvency problem, so there might not be any conflict. But
technically, JJ Ltd and Jason can be separate legal entities.
To apply Salomon’s case, An individual can operate in several different capacities in
relation to a company.
6. What are the ASX Listing Rules? To which companies in the case studies do they
apply? Are the listing rules legally binding?
Number of shareholders: minimum 300 non-affiliated investors at $2000 each. Free
float:20%. Profit test: A$1 million aggregated profit from continuing operations over
past 3 years + A$500,000 consolidated profit from continuing operations over the last
12 months. OR asset test: $4 million net tangible assets or $15 million market
capitalization. https://www2.asx.com.au/listings/how-to-list/listing-requirements
AMGL applies.
Problem set 2
1. SAFPL consolidated the farm business in 1981. Until then, some of the business
had been operated by Michael Henry and Alexander Boyle, his brother-in-law, as a
partnership. What are some of the key differences between a partnership and a
company, as a vehicle for operating a business?
Partnership: valid agreement, business being carried on, in common, view of profit.
There is no need to take any formal legal steps to create a partnership. A partnership
is not a separate legal entity, partners do not have limited liability. Joint and several
liability: each partner is principal and agent of the business so each partner may incur
liabilities on behalf of the business. And each partner will be liable for debts and
obligations properly incurred on behalf of the business by other partners. There is a
fiduciary relationship, maximum of 20 partners. liability is capped at the amount of
capital but not involved in management.
Partners own, partners operate. In a company, board of director and managers operate,
shareholders own.
Individual tax rate vs. company tax rate
3. Can you describe three differences between an incorporated association and a
company?
Incorporated association: large bodies needing to sign contracts and own property.
Incorporated association is not allowed to distribute profit to member. Cannot be
primarily for business or trading purpose. Is not subjected to the full term of the Corp.
Act 2001
An association is a group of individuals who have come together for a common
purpose. They typically have a structure which resembles a corporation in so far as it
has members and a board which oversees the day-to-day operation of the association.
These associations can be incorporated, providing a separate legal entity which has
the ability to enter into legal relations in its own right
The key differences between a corporation and an incorporated association are:
-
An incorporated association is not allowed to distribute profit to members
An incorporated association cannot be primarily for business or trading purpose
An incorporated association is not subject to the full terms of the Corporation Act
4. AMGL has a 50% stake in JV Investor Pty Ltd. The AMGL Annual Financial
Report lists JV investor as a controlled entity. What legal test determines whether one
company is controlled by another?
The concept of control is defined in s50AA: an entity controls a second entity if the
first entity has the capacity to determine the outcome of decisions about the second
entity’s financial or operating policies
In deciding whether the test is met, the practical influence exerted by the first entity
and any practice or pattern of behaviour affecting the second entity must be taken into
account
Establishment and administration cost: the cost of forming a company must be
compared with the costs involved in other forms of business association
Publicity: all companies are required to disclose information about participants to
ASIC
Public law obligations: companies and their participants are subject to regulation
under public law. Many of the obligations imposed on companies and their
participants under Corporation Act are public law obligations, in the sense that they
can be enforced by the state through criminal sanctions or the imposition of civil
penalties
application of law:
Companies as large commercial enterprises:
s115 prohibits outsize partnerships.
Corporate law as a standard form contract between participants
Business associations involve relationships between participants. The respective
rights and responsibilities of investors, managers and creditors must be agreed
between those participants. Company law can be seen to provide “standard form”
terms governing aspects of those relationship
Taxation consideration:
Companies are “taxpayers” for the purposes of Australian income tax legislation.
They pay income tax at a lower marginal rate than individuals
Tutorial 3
Problem set 2
4. AMGL has a 50% stake in JV Investor Pty Ltd. The AMGL Annual Financial
Report lists JV Investor as a controlled entity. What legal test determines whether
one company is controlled by another?
The concept of control is defined: an entity controls a second entity if the first entity
as the capacity to determine the outcome of decisions about the second entity’s
financial or operating policies.
In deciding whether the test is met, the practical influence exerted by the first entity
and any practice or pattern of behavior affecting the second entity must be taken into
account.
All subsidiaries are entities controlled by their parent company. But the concept of
controlled entities is wider than that of subsidiaries, so that a company could be
controlled by another company without being its subsidiary.
5. Is JV Investor Pty Ltd a subsidiary of AMGL?
S46 contains 4 tests as to whether a holding Co and subsidiary exists. S Co is a
subsidiary of H Co if one of the following is satisfied: 1. H controls the composition
of S Board of directors. --s46(a)(i). 2. H controls more than half of the voting power
of S.—s46(a)(ii). 3. H holds more than half share of capital in S. –s46(a)(iii). 4. S is a
subsidiary of another subsidiary of H.—s46(b). Since AMGL holds 50% shares of JV,
AMGL is not JV’s holding company.
6. Imagine that the constitution of JV Investor Pty Ltd includes a provision limiting
the company’s objects to investing in start-up fintech businesses. Having regard to
the effect of s 124 and 125 of the Corporations Act, what is the legal effect of that
limitation?
Section 124 of the Corporation Act gives a company the legal capacity and powers of
a natural person. This means that a company can do anything that a natural person can
do, such as enter contracts and hold property. In addition, companies have certain
powers that natural persons do not have, such as the power to issue shares and
debentures.
The fact that a company has such wide powers may not suit all of its participants. To
this end, participants in companies may agree in the company’s constitution that the
company will limit its activities in certain ways.
Such restrictions are envisaged by s125(1) of the Corporations Act, which provides
that ‘if a company has a constitution, it may contain an express restriction on, or a
prohibition of, the company’s exercise of any of its powers’. Under s125(2), ….. the
intention of participants in including an objects clause in the constitution may be that
the company’s activities be restricted to things consistent with or incidental to those
objects. This means that third parties that deal with companies can enforce obligations
incurred by companies, even where those obligations were incurred in breath of these
internal restrictions. In this way, we can see that these two sections of the
Corporations Act abolish the doctrine of ultra vires, which at common law means that
a company’s acts outside of its constitution are invalid and void.
However, there can be consequences resulting from acts which are outside restrictions
in the company’s constitution. We know the constitution is a statutory contract, so
acts in breach of the constitution may amount to t abreach of the statutory contract
represented by the company’s constitution. The effect of breaches of a company’s
constitution is discussed in Chap5
In such a case however, s125 also restricts the impact of these limitations in power.
7. AMGL is hoping that its investment in JV Investor Pty Ltd will be successful and
that one day it will be large enough to be listed on ASX in its own right. Will this be
possible? Discuss.
Listing on the ASX offers a company a mechanism to increase their visibility and
raise equity finance from investors. Only public companies may be listed on the ASX,
so before anything can be done with JV Investor Pty Ltd. It is necessary for JV to
changes its company type to that of a public company. This change will likely
necessitate the appointment of additional directors and other amendments to the
company structure.
Once this change had been made with ASIC, the now public JV will need to meet the
requirements for ASX listing. The ASX has discretion to accept or reject any
application. It has set out its criteria for listing in chapter 1 of the ASX Listing Rules.
As a general rule, the ASX requires that a public company: 1. Has a structure and
operations that are appropriate for a listed entity. 2. Has a constitution and the
constitution is consistent with the listing rules. 3. A prospectus or information
memorandum containing detailed information about the company and the securities is
prepared. 4. Applies for quotation of its “main class” of securities, usually, the
ordinary shares. 5. The company has at least 300 security holders in the class of
securities to be quoted holding at least $2000 worth of those securities each and a
minimum free float of 20%. 6. The company meets certain tests designed to measure
its viability. Generally, it will be required to show an aggregated profit of $1m over
the past three years and $500000 consolidated profit over the past 2 months, or either
net tangible assets of at least $4m or market capitalization of at least $15m at the time
of listing. It must also meet other financial tests.
The company must satisfy additional ASX requirements relating to the issue price,
spread of securities holdings and terms of issue of each class of security to be quoted.
The prerequisites for official quotation are set out in chapter 2 of the listing rules.
Listing rules 6.1 states that the terms of any equity securities to be quoted must be
appropriate and equitable in the opinion of the ASX.
the biggest disadvantage of changing from a proprietary into a public is disclosing
more financial information, and the separation of ownership and management (agent
problem). If you want to get listed, you do not get an approval straightway. You have
to meet the criteria for listing.
9. If a holding company allows its subsidiary to incur a debt while the subsidiary is
insolvent, will the courts ‘pierce the corporate veil’ and make the holding company
liable for the debt?
Section 588G is the general provision which holds directors personally liable if they
know or ought to have known that a company is insolvent when it incurs a debt (or
would become insolvent by doing so).
588V imposes a similar liability on a holding company that allows a subsidiary to
incur a debt while insolvent. If the company is a holding company of a company at
the time when the company incurs a debt; the company is insolvent at that time, or
becomes insolvent by incurring that debt, or by incurring debt…….
Problem set 3
The following questions should be answered after you have read Chapters 5 and 6.
1. The board of SAFPL is interested in producing a range of organic lamb. They have heard that
a property in the Riverina is for sale; the land has already been appropriately certified for
organic production by the relevant authorities. However, the venture is risky and the board has
decided to incorporate a new subsidiary, to be called SA Organic Meat Pty Ltd (SAOM), to
acquire the property. What decisions must be made, and what steps must be taken, to
incorporate the new company?
S117 and Form 201 for registering a company. The following matter need to be
addressed:
- the type of company, a proprietary company or a public company
- identify the member or members of the company, the number of shares and whether
there are different classes of shares. All companies must have at least one members
must consent in writing to becoming members of the company: s231
- identify the secretary or secretaries of the company. All public companies must have
at least one secretary, and the secretary must consent to the appointment:s204A
- choose an address to the company’s registered office s121
- choose a constitution or replaceable rules as internal governmance rules
- choose a name for the company: Pt 2B.6 of the Corporations Act
Tutorial 4
Problem set 3
3.Nick Henry has a real passion for the organic lamb project and would like SAOM to
adopt a constitution that includes a provision guaranteeing his position as head of
development at SAOM. Having regard to s 140 of the Corporations Act and the
relevant case law, would Nick be able to enforce such a provision against SAOM?
Section 140 specifies that the constitution of a company acts as a contract between the
company and each member, between the company and each director and company
secretary and between a member and each other member. If a constitution were
adopted that included the provision guaranteeing his position as head of development
at SAOM., the provision would only be enforceable between these parties.
The current case mirror Eley v Positive Government Security Life Assurance Co
where the company constitution specifies that Mr Eley should be appointed as the
company solicitor. He was not appointed to the position, and he took legal action as a
solicitor, although he was also a member. It was found that he could not enforce the
constitution as the constitution does not act as a contract between other persons and
the company. The same principle is likely to apply in the current scenario.
7. Jason Jones owns 10 ordinary shares and five A class shares in SAFPL. He has
heard about the proposed formation of SAOM and acquisition of the new farm and
thinks a move into organic meat production would be a mistake. What steps, if any,
can he take to prevent SAFPL going ahead with the deal?
Decision-making in solvent companies is divided between the directors and the
members.
The basis on which decision-making is divided depends on the law and the company's
internal governance rules. This is referred to as the organic principle. Each organ of
the company has power to make decisions, so that neither organ has to follow the
instructions of the other and neither can usurp the decision-making power of the
other:
Automatic Self-Cleansing Filter Syndicate Co Lid v Cunninghame. The respective
powers of each organ of the company are determined by the law and the company's
internal governance rules.
The scope of the directors' power of management is determined by s 198A of the
Corporations Act (or a similar provision in the constitution). Section 198A (1)
provides that the business of the company is to be managed by or under the direction
of the directors.
Section 198A (2) goes on to provide that the directors may exercise all the powers of
the company except any powers that [the Corporations Act] or the company's
constitution (if any) requires the company to exercise in general meeting.
The broad effect of internal governance rules such as the replaceable rule in s 198A is
to confer on the board of directors, the power to make decisions on all matters other
than those that are expressly reserved to the general meeting by the Corporations Act
itself or by express provisions of the company's internal governance rules.
Application of law
You need to look at the type of decision. Here, the decision to acquire an asset is a
business decision that is within the power of the board of directors. In these
circumstances the members do not have the right to interfere with the board's decision
- see Automatic Self-Cleansing Filter Syndicale v Cunninghame and John Shaw and
Sons. So, Jason Jones, who is a minority shareholder, is unable to prevent SAFPL
from going ahead with the deal.
If members disagree with a decision made by the board on a matter that the board has
power to decide, what options are available to them? Members can only use the
specific decision-making power available to them, in general meeting, such as
removing the director or directors from office and, where they have power to appoint
new directors, replacing them with directors who are amenable to the members'
wishes. Alternatively, the members may be able to alter the company's internal
governance rules to restrict the directors' future power to act without first obtaining
member consent.
Problem set 6
5. JV Investor Pty Ltd has four directors: Adderson, Boon and two nominees of
Blue Ltd, the company that owns the other 50% of the issued shares in JV Investor.
JV Investor has spent several million dollars on developing the new technology, but it
is not going well. The chief operating officer of JV Investor sent a report to its
directors explaining that there were cash flow difficulties, that rival technologies
were emerging, and that the prospects of JV Investor raising further capital by
borrowing or further equity injections from AMGL or Blue were limited. At a board
meeting attended by Boon and the two Blue nominees, the directors resolve to enter
into an agreement with a German software firm to purchase some intellectual property
that might assist the project. Adderson is away on holidays and does not attend the
meeting. Have the directors (or any of them) breached their statutory duty to
prevent insolvent trading by JV Investor?
To decide whether s588G apples, look at the four requirements of $588G (1).
Application of law
1. JV Investor has incurred a debt. By ordering the spending the money developing
new technology, JV Investor has incurred a voluntary liability for a specified amount
that is of a kind the law recognizes as a 'debt. (This is so whether the debt is taken to
have been incurred when the order is placed or when the goods are delivered - see
Credit Corporation Australia Pty Lid v Atkins and Leigh-Mardon v Wawn.
2. It applies to directors only - you know that Adderson, Boon and the 2 nominees are
directors at the time the company incurs the debt.
3. It appears that J Investor is insolvent at the time the debt is incurred. It is insolvent
if it is unable to pay all its debts when they become due for payment. s95A of the
Corporations Act. You know from the memo that the company has cash flow
problems and its fundraising options constrained. (Although the cash flow test alone
is not the test of insolvency, it includes the company's present and expected cash
resources).
4. At the time, there are reasonable grounds for suspecting insolvency. In other words,
a director of ordinary competence, who is capable of having a basic understanding of
the company's financial status, would have a 'positive feeling of actual apprehension'
of insolvency in the circumstances described in the board memo.
By fading to prevent JV Investor from incurring the debt, the directors contravene
$588G(2) if they knew or should have known of the grounds to suspect insolvency.
Example of director lability for insolvent trading
In Green v CGU Insurance Ltd, directors of a copper mining company were held
liable for insolvent trading because the court found the company was insolvent and
the directors were aware of the following facts.
1. there was severe disruption of mine production due to bad weather, low ore grades,
delays in shipping the ore, and machinery and equipment problems
2. there were cash flow difficulties, and the company was not paying its creditors
3. there was a continuing drop in copper prices, and
4. there was no ability for the company to raise extra funds.
Here, the directors did know or should have reasonably known of those grounds,
because a reasonable person in their position in a company like J Investor would
know these things; the directors would be expected to be meeting their duty to
monitor and understand the company's financial position.
6. If the directors of JV Investor have breached their duty to prevent insolvent
trading, what action (if any) can the German firm take against them? Assume that the
debt owed to the German firm under the contract is unsecured.
Section 588G is a civil penalty provision. ASIC can apply to the court for a
declaration of contravention. If the court makes a declaration, ASIC can ask for a
pecuniary penalty of up to$200,000 and an order that the director compensate the
company. ASIC can also ask for a dis1ualification order on the directors.
The unsecured creditor will first look to the company to recover its debt, however, if
JVInvestor is in liquidation, the creditor can sue the directors for compensation (if the
liquidator has not already done so), but this requires the consent either of the
liquidator or the court.
S588R of the Corporations Act.
Problem set 8
1. Look at question 5 of Problem Set 6. Assume that the directors of JV Investor have
breached their duty to prevent insolvent trading. What consequences can follow?
See (112-180]. [115-140] and s1317E of the Corporations Act
Section 588G is a civil penalty provision under s1317E. There are three consequences
to directors that can result from a breach of s588G as a civil penalty provision. This
means ASIC can enforce the insolvent trading duty, if the company is in liquidation,
as follows:
(1) Disqualification - an order disqualifying the director from managing companies
for a specified period: s206C
(2) Pecuniary penalty - an order to pay a pecuniary penalty if the breach
• materially prejudices the interests of the company or its members, or
• materially prejudices the company's ability to pay its creditors, or .is serious:
$1317G of the Corporations Act.
(3) Compensation - an order for compensation can be brought by ASIC or the
company: s1317J of the Corporations Act.
In some circumstances, an individual creditor may sue a director for compensation for
breach of s588G. The creditor can only do so if the company is being wound up and
the creditor must obtain the written consent of the company's liquidator: s588R of the
Corporations Act
Tutorial 5
Problem set 6
1. At SAFPL, David remains concerned about the level of dissent and discontent
Jason is stirring up among the Henry grandchildren. He decides to contact Steven and
offer to acquire Steven’s shares in SAFPL. As managing director, David knows there
is a good chance that the company will soon enter into a supply agreement with a
major food processer in the United States that will greatly enhance the value of the
business. He believes now is the right time to make an offer for Steven’s shares,
before the deal is finalized and announced. David knows that, as a director of SAFPL,
he owes duties to the company. But does he owe any duties to Steven in these
circumstances?
See [111-160] and Brunninghausen v Glavanies.
The duties of directors and officers are owed to the company, not the individual
members However, in certain circumstances a court can decide that a relationship
between two people is 'fiduciary' in character. There are various categories of
relationships that are accepted as fiduciary - these include between partners, between
a director and a company, between a trustee and a beneficiary, between a solicitor and
a client, and between an agent and a principal. The categories of fiduciary relationship
are not closed, and sometimes courts will extend the characterization to particular
relationships or circumstances. Saying a relationship is fiduciary means that the
person in the position of power is required to prefer the interests of the person to
whom the duties are owed over their own interests when acting in a way that affects
that person.
In Brunninghausen v Glavanics, the court was prepared to impose fiduciary duties on
Mr Brunninghausen because he was in a position of particular advantage in relation to
Mr Glavanics, a co-director and shareholder. The special circumstances (confidential
negotiations to sell the business of the company) allowed Mr Brunninghausen to
exploit Mr Glavanics. Also relevant was the 'family' context of the dispute.
The case is not really an 'exception' to the general principle. Instead, it is better to
think of the corporate relationship between the two men as providing the framework
or context for the imposition of fiduciary duties in these particular circumstances.
Application of law
This is potentially what is happening here.
Does David owe fiduciary duties to Steven personally?
There are some similarities between David's case and Brunninghausen in that the
special factors present in Brunninghausen are evident here. In any event, David's
fiduciary duty to the company does not preclude a separate fiduciary duty to Steven.
2. JV Investor Pty Ltd is 50% owned by AMGL. In 2009, AMGL was approached by
Blue Ltd, the other shareholder in JV Investor, to make a further major investment in
JV Investor, to enable it to develop a new and highly prospective technology based on
blockchain. The then directors of AMGL delegated to others, including a computer
expert, the task of obtaining the technical information about the prospects of the
technology. The report prepared for the directors indicates that the proposed
investment should be very successful. Queried by his fellow directors about the
optimistic forecasts, Mr Chester (who has an information technology qualification)
assures them that all appears to be in order. However, some of the information has
been negligently prepared. This means that, when the directors rely on the report and
invest AMGL’s funds in the technology, the investment will not be as successful as
the report indicates. Have the directors of AMGL (or any of them) breached their duty
of care?
The director with more relevant knowledge will take more duty of care on that issue
compared to other directors. So, it’s more reasonable for Mr. Chester to rely on the
report because he has more skills. Always apply Daniel’s case and section 180.
This is the minimum standard for directors. The individual circumstances of the
officer and the company will in most cases lift this standard.
In ASIC v Vines, the court stated that the position of chief financial officer is a
recognized position in large corporations, such that there are identifiable specialized
skills attaching to that office.
In relation to non-executive directors, there is no objective standard of the reasonably
competent company director. If a non-executive director is appointed to a company
because of special skill or expertise, then whether the director has breached the duty
of care will be tested by reference to the knowledge and expertise possessed by other
people with that same skill and expertise.
By way of defense, an important aspect of the duty of care is the extent to which
directors may delegate certain functions to others and rely on those people to perform
the functions properly.
Section 198D allows the directors of a company to delegate any of their powers.
However, s190 of the Corporations Act goes on to say that a director will not be
responsible if:
• the director always believed on reasonable grounds that the delegate would exercise
the power in accordance with the duties imposed on directors of the company by the
Corporations Act and the company's constitution; and
• the director believed:
- on reasonable grounds
- in good faith, and
- after making proper inquiry if the circumstances indicated the need for the inquiry,
that the delegate was reliable and competent in relation to the power delegated.
Section 189 of the Corporations Act states that it is assumed that reliance by a director
on information or advice is reasonable and not a breach of duty (unless it is proved
that the reliance was not reasonable) where the reliance was made:
• in good faith; and
• after making an independent assessment of the information or advice, having regard
to the director's knowledge of the company and the complexity of the structure and
operations of the company.
See also ASIC v Healey.
Application of law
This is a poor decision that has resulted in a loss to the company. Is it also a negligent
one?
The directors delegated the function of the feasibility report to a consulting computer
expert and relied on that advice.
Mr Chester should have realized It was not reasonable to rely on the report. The other
directors, who are not IT specialists, would not be expected to be able to see this when
they made their assessment of the information. So Mr Chester is likely to be held to a
'higher' standard than the others It probably was not reasonable for Mr Chester to rely
on the report, although it was reasonable for the others to do so Given that he should
not have relied on the report, Mr Chester was negligent in that he did not seek out
additional information about the prospects of the blockchain technology before
making the decision to pursue the venture.
3. Gina Gunter is the company secretary and general counsel of AMGL. In 2010, she
was the executive responsible for conducting the negotiations with JV Investor and
Blue Ltd. She formulated the proposal that came to the AMGL board, supervised the
due diligence, retained the IT experts, and settled the relevant contracts. She was an
enthusiastic supporter of the project and was keen to ‘get it done’. Did Ms Gunter owe
a duty of care to AMGL? To JV Investor? If so, did she breach that duty?
See [M11-200] - [T11-220], s180, s189 and s190 of the Corporations Act and ASIC v
Hellicer.
The duty of care is owed by directors and officers. In ASIC v Hellicar and ASIC v
Macdonald, the officer who occupied the position of corporate secretary and general
counsel was also held to have breached s180(1) by failing to advise the board of
certain information.
Application of law
As for the previous question, you need to apply the standards expected of a reasonable
company officer in Gina's position. She had responsibility for the carriage of the
matter - she was effectively the person to whom the board delegated responsibility.
You would have to determine from the facts whether Gina discharged the standard
expected - did she advise the board of all information she knew or was reasonably
required by her position to know?
4. Once the problems with JV Investor become apparent, AMGL’s advisers prepare a
draft notice to be sent to the ASX in compliance with AMGL’s continuous disclosure
obligations under ASX Listing Rule 3.1. The notice states that disappointing results
from the JV Investor project are not expected to impact on AMGL’s financial
performance for the relevant year. In fact, this is not correct, and this would have been
apparent from a careful reading of the monthly management accounts and projections.
The directors of AMGL say that they never saw the draft notice and if they had seen
it, they would not have approved it. However, the board minutes suggest that the
directors saw and approved the notice. It is sent to the ASX immediately after the
board meeting. The directors do nothing to correct the notice once it is released. Have
the directors (or any of them) breached their duty of care?
Use s180 and Daniel’s case, no delegation so no use of s189 or 190.
This Is the minimum standard for directors. The individual circumstances of the
officer and the company will in most cases lift this standard.
In the James Hardie (JHIL) litigation, the CEO was held to have breached his duty in
s 180(1) by voting to approve the draft announcement. In addition, he breached s
180(1) in several other respects, including by
• failing to advise the board that the draft announcement was expressed in too
emphatic terms concerning the adequacy of funding to meet all legitimate asbestos
claims, and making comments at a press conference that were false or misleading and
potentially harmful to JHIL.
The chief financial officer and the person who was both the general counsel and the
company secretary were also held to have breached s 180(1) by failing to advise the
board of certain information that was relevant to the draft AX announcement.
Individual assignment:
Think about step process, if fund breach what is the consequences, remedy. iRAC,
include bibliography, separate issues, think about which director breach which duties.
All cases and legislation used in the paper. Just list it. Not included in the word count.
In IRAC, when writing rules, list the title and write a sentence to conclude the rule,
and in application explain the related rules.
Tutorial 6
Problem set7
1. SAFPL is proud of its longstanding connection with the Naracoorte region of South
Australia, where it is a significant employer. The local hospital is raising money to
build a new aged care facility for the community. David would like SAFPL to make a
significant donation to fund the new facility, which he hopes will be called the
‘Timothy and Angela Henry Home’. Peter O’Donnell has queried whether this is an
appropriate use of corporate funds, particularly given the substantial investment
SAFPL will be making this financial year in developing the organic project in the
Riverina. Having regard to their duty to act in the best interests of SAFPL, can the
directors approve the donation?
Section 181 of the corporations act states that a director or other officer of a company
must exercise their powers and discharge their duties.
-in good faith in the best interest of the company
-for a proper purpose
These statutory duties are the same as the general law duties that require directors to
act in good faith in the interest of the company and for a proper purpose.
The courts have said that directors must act in the interests of the company “as a
whole”. See Greenhalgh v Arderne Cinemas Ltd. This means that directors must
balance the interests of majorities members while acknowledging that in most
circumstances, the interests of the company will be those of the majority of its
members.
A company typically has many stakeholders (that is, those who deal with, or have an
interest in, the company). These stakeholders include members, directors, employees,
and others. When we say that directors have duty to act in the best interests of the
company, are the interests of the company those of: member, the company as a
commercial entity separate from its members, creditors, other companies within a
group of companies, or employees, customers, suppliers, and the community?
Directors need to know what is meant by the interests of the company if they are to be
sure that they do not breach this duty.
Application of law:
In deciding where the interests of the company lie, the general rule is that the directors
should look to the interests of the members. You must realize the commercial impact
of the transaction—this is a significant donation of the company’s funds, but how is it
in the interests of the company as a whole? You need to weight up the company’s
interests against David’s family interests, which appear to be quite personal.
There is no breach of duty if there is a demonstrable connection between SAFPL’s
interests as a company, and the donation (cf Parke v Daily News). The directors
can argue that the donation will enhance SAFPL’s reputation and relationship with
government, community, employees and customers. On the other hand, there seems to
be considerable self-interest behind David’s supporting argument, in promoting the
family interests.
Unless the donation can be seen to be in the interests of the company, it ought not
to be made by directors.
2. The failed investment in JV Investor is impacting on AMGL’s financial position.
Primo Ltd has some money on deposit, and so to smooth over the current difficulties
at AMGL, Primo makes an unsecured loan of $5 million to AMGL. Have the
directors of Primo breached their duty to exercise their powers and discharge their
duties in the interests of Primo?
In the case of a company which is member of a corporate group, such as parent
company-subsidiary relationship, do the interests of the company include the interests
of other companies in the group? Where there is a question as to whether directors of
a company have breached their duty to act in the interests of that company by making
a decision that benefits another company in the group, most courts have applied the
following test:
-whether an intelligent and honest person in the position of the director could have
reasonably believed that the decision was for the benefit of the company: see
Charterbridge Corp Ltd v Lloyds Bank Ltd, Farrow Finance Co Ltd v Farrow
properties Pty Ltd and Equiticorp Finance Ltd v Bank of New Zealand.
Further, s187 of the corporation act states that a director of a company that is a
wholly owned subsidiary of another company is to be taken to act in good faith in
the best interest of the subsidiary if:
-the constitution of the subsidiary expressly authorizes the director to act in the best
interests of the parent company
-the director acts in good faith in the best interests of the parent company, and
-the subsidiary is not insolvent at the time the director acts and does not become
insolvent because of the director’s act
Application of Law
The fact here is a simpler version of the inter-group transaction in Equiticorp.
Arguably, the directors of Primo Ltd have not breach their duty to their company,
by the parent company loan. If the parent company has financial difficulty, then this
would potentially be disastrous for the whole group, including Primo. In applying the
test of what is honest and reasonable, you may need to query that the loan is a
proper commercial transaction, that is:
-it is a genuine loan that is intended to be repaid and not a gift of the funds, and
-the directors of Primo Ltd considered the interest of their company in priority
If Primo’s constitution contained the provision set out in s187, then this would make
the position clearer for their directors of.
3. At AMGL, Adderson and Eager are concerned that the significant stake in AMGL
acquired by XYZ Limited means that they might end up frozen out of the business
they started. For some time, Eager has been in discussion with another finance
industry figure about a highly prospective investment play in Europe. Eager suggests
to Adderson that AMGL issue 500,000 shares to this person as a means of creating
ties with AMGL that might help it to secure access to the project in the future.
Adderson and Eager bring the proposal to the AMGL board. Mr Xu is furious as he
sees it as a ploy to entrench further their control of the company by putting shares in
the hands of a person who is likely to support Adderson and Eager in the future. If the
share issue goes ahead, have the directors breached their duty to exercise their
powers for a proper purpose?
Section 181 of the corporation act has two limbs to the duty:
-act in good faith in the best interest of the company and
-act for a proper purpose
The question asks whether the directors of AMGL have used the share issue power for
an improper purpose, which is the second limb of s181
A two-step analysis is involved: see Howard Smith
First, ask for what purpose as a matter of law, has the share issue power been
conferred on director. The law recognizes various legitimate purposes, including:
-capital raising
-giving employee incentives and
-entering into business sharing structures
Second, ask for what purposes as a matter of fact the directors have used the power.
Here the directors of AMGL appear to have several purpose to the share issue—they
have expressed concern about strengthening their own position, but also express a
strategic advantage for AMGL in securing the support of a new equity investor for
the purpose of future transactions
Where directors have mixed purposes, in order for there to be a breach of duty. It
must be shown that the substantial purpose was improper and that, but for the
improper purpose, the director would not have exercised the power, see Kokotovich
Constructions Pty Ltd v Wallington and Whitehoude v Carlton Hotel Pty Ltd.
On balance, the joint venture proposal seems speculative and designed to further the
directors’ improper purpose. Accordingly, to issue the shares for this purpose would
amount to a breach of duty by the directors of AMGL.
Problem set 8
For many years, SAFPL has had a transport and logistics contract with a company
called BigTrucks. That contract is due for renegotiation. Peter O’Donnell, who is a
director of SAFPL, owns RiverTrans Pty Ltd. He would like RiverTrans to tender for
SAFPL’s transport and logistics business. Advise Peter and the SAFPL board on what
is required when a company controlled by a director of a proprietary company enters
into a contract with that company. 多年来，SAFPL 一直与一家名为 BigTrucks 的公司签订运输和
物流合同。该合同应重新谈判。SAFPL 董事 Peter O'Donnell 拥有 RiverTrans Pty Ltd。他希望 RiverTrans
投标 SAFPL 的运输和物流业务。向 Peter 和 SAFPL 董事会提供建议，当由专有公司董事控制的公司与该
公司签订合同时需要什么。
2. Look at question 3 of Problem Set 7. Assume for the purposes of this question that
the board of AMGL issued 500,000 shares in breach of its duty to exercise the share
issue power for a proper purpose. What action, if any, can ASIC take against the
directors who voted in favour of the share issue? 就本问题而言，假设 AMGL 董事会发行了
500，000 股股份，违反了其为正当目的行使股份发行权的义务。ASIC 可以对投票赞成股票发行的董事采
取什么行动（如果有的话）？
There are three consequences for directors and officers that can result from a breach
of s181 as a civil penalty provision:
- an order disqualifies the person from managing companies for a specified period of
time (s206C)
- an order to pay a pecuniary penalty of up to $200,000 (s1317G) and/or
- an order to pay compensation to the company for any loss or damage it has
incurred because of the breach of duty (s1317J)
If ASIC believes that a breach of the statutory duty is so serious that a criminal
penalty such as imprisonment should be imposed, it can bring criminal proceedings
under s184(1) of the Corporations Act. A director or other officer commits an offence
and can be subject to criminal penalties if they are reckless or intentionally
dishonest in the breach of duty.
3. What action, if any, can Mr Xu and XYZ Ltd take in relation to the improper share
issue? 徐先生及 XYZ 有限公司可就不当股份发行采取甚么行动（如有）
The duty to act for a proper purpose is both a statutory duty (s181) and general law
duty. General law duties are owed to the company. This means that the company
bring legal action to enforce these duties, but in some circumstances as individual
member is able to bring legal action on behalf of the company against the director or
directors.
There are two issues:
-
What are the compay’s civil remedies?
How can the remedy be enforced?
Civil remedies:
As noted in the previous questions, if this is breach of a statutory duty, the company
has the right to seek a compensation order under the civil penalty provisions: s 1317H
For a breach of the general law duties, there are several remedies available:
-injunction
-Damages
-Account of profits
-rescission of contract
-constructive trust
If the share issue is for an improper purpose, it is likely that Mr Xu could get an order
from the court preventing the share issue going ahead. If he is a person whose rights
are affected by the share issue, see s1324. Section 1324 says that where a person is
proposing to engage in conduct that would constitute a contravention of the
corporation act s181, the court may grant an injunction restraining them from
engaging in the conduct. This kind of injunction is an order from the court that the
directors must not do the thing they are proposing to do. If they go ahead and do it,
they are in contempt of court and can be punished.
Who enforces?
Originally the company would be the proper person to bring an action for breach of
duty, and a member will not have standing. The statutory derivative action in Pt
2F.1A allows, in exceptional circumstances and with the permission of the court, for a
member to bring the company’s legal action.
This will only be allowed if the criteria in s237(2) are satisfied. That section says that
the court must grant the supplication if it is satisfied that:
-
It is probable that the company will not itself bring the proceeding, or properly take
responsibility for them, or for the steps in them, and
The applicant is acting in good faith and
It is in the best interest of the company that the applicant be granted leave, and
If the applicant is applying for leave to bring proceedings, there is a serious question to be tried
and
Either (1) at lease 14 days before making the application, the applicant gave written notice to
the company of the intention to apply for leave and of the reasons for applying, or (20 it is
appropriate to grant leave even though subparagraph (1) is not satisfied.
All the criteria must be met in order for the court to grant a mamber’ application to
bring a derivative action.
Tutorial 7
Problem set 4
The following questions should be answered after you have read Chapters 7 and 8.
1. SAFPL has two classes of shares on issue — ordinary shares and A Class shares.
Under the terms of the SAFPL constitution, each A Class share currently carries an
entitlement to vote on any resolution to amend the company’s constitution. The
directors of SAFPL would like to have the constitution amended so that A Class
cannot vote on constitutional amendments. Is this possible? If so, what would be
required to make that amendment?
Members’ voting rights are limited to the matters expressly provided for in the
Corporation Act, the internal governance rules and the general law. Although matters
about issuing news share capital would normally be a decision for the board, decisions
affecting the rights attached to existing shares are a constitutional matter that is
reserved for members’decision-making. Generally, corporate actions that vary or
capital rights attaching to a class of shares require the approvsl of the mambers whose
rights are affected under Pt 2F.2 of the Corporations Act.
A variation or cancelltion of class rights requires both a special resolution of the
company and a special resolution of the votes in the class whose rights are being
varied or cancelled disagree with the proposed variation or cancellation of their rights,
they can apply to the court within one month of the resolution being passed to have
the resolution set aside.
This proposal involves a variation of the A class shareholders’ class rights, so
s246B(2) applies. In this case, rights attaching to shares in a class of shares may be
varied or cancelled only by:
-
a special resolution of the company;
a special resolution of, or the consent in writing of, members holding at least 75% of the votes
of the members of the class whose rights are varied or cancelled.
Application of law:
To make the amendment, the board of SAFPL will have to call a class meeting of A
class shareholders and receive 75% majority vote to support the variation in their
voting rights, as well as calling a general meeting of the company as a whole to
approve, by 75% majority, the resolution.
2. As a listed public company, AMGL is required to produce a remuneration report to
be voted on by shareholders at its annual general meeting (AGM). Two of its
shareholders, ABC Asset Management LP and Canny Ltd, have indicated to AMGL’s
chairman that they intend to vote against the report at the AGM because they believe
the remuneration arrangements for senior executives are too generous. They think a
number of small shareholders will vote with them. What would be the effect on
AMGL if more than 25% of the shareholders vote ‘no’ to the report at the next
AGM?
Executive remuneration and the “two strikes” rule.
Section 250R of the Corporations Act requires listed companies to put the company’s
remuneration report (prepared as required by s300A) to a ‘non-binding’ vote of
shareholders at the AGM.
Amendments made in 2011 changes the law by setting out the consequences of a
significant vote by shareholders against the remuneration structure.They provide for a
‘two strikes then spill’ process. The process is triggered if more than 25% of votes at
an AGM are cast against adopting the remuneration report.
The first strike is a “no” vote of 25% or more on the resolution that the remuneration
report be adopted. In its next remuneration report after the first strike, the board must
address any comments made at the AGM and explain its proposed actions (if any).
The second strike is a “no” vote of 25% or more on that next remuneration report. If
this occurs, a spill resolution must be put to shareholders at the same AGM as the
second-strike vote. Directors who were directors when the board resolved to put the
remuneration report to the AGM, must stand for re-election.
Application of law:
If AMGL receives a ‘no’ vote this year on the remuneration report, it must be ‘more
than’ 25% to trigger the two strikes rule. The immediate consequence is that next year
AMGL will have to address any comments made and explain its actions. You will
then have to see what happens at next year’s AGM – if a second ‘no’ vote of more
than 25% is received, then this will trigger the requirement that the shareholders at
next year’s AGM will also have to vote on a ‘spill’ motion, meaning that the board
position will be declared vacant and an election held at a new meeting within 90 days.
3. China Investments Pty Ltd is a wholly owned subsidiary of AMG that has not
adopted a constitution. It currently has two directors: Charlie Chester (who is also a
director of AMGL) and Tom Tucker, an employee of AMGL. Tom has resigned from
AMGL and AMGL would like to replace him on the China Investments board with
Wendy Wu. What steps are required to do this?
Proprietary companies
The replaceable rule in s201G of the Corporations Act provides that a company’s
directors may be appointed by resolution passed in general meeting. The replaceable
rule in s201H(1) of the Corporations Act also allows the appointment of a director by
a resolution of the board, but s201H(2) requires that, where a person is appointed in
this way, the company must confirm the appointment by resolution within two months
after the appointment is made.
Application of law:
As China Investments does not have a constitution, the replaceable rules will apply
(s135). The board of China Investment can appoint Wendy to the board using the
casual vacancy power in the internal governance rules, but Wendy’s appointment
must be confirmed by resolution at a general meeting, two months after her
appointment.
4. Canny Ltd would like to appoint Larelle Lawn, a solicitor, as its proxy to vote on
the various resolutions to be put to the AGM of AMGL. How does Canny go about
appointing a proxy? Could it appoint Larelle as its corporate representative instead?
A member who would like to vote or have their interests represented at a general
meeting, but is unable to attend in person, has two options:
-
appoint a proxy (s249X);
-
appoint a corporate representative, if it is a member who is a body corporate and cannot attend
a meeting “in person” because it has no corporeal existence, it may wish to appointing it: ASIC
v Whitlam.
A body corporate can appoint an individual as its representative to exercise all or any
of the powers the body corporate may exercise at the meeting: s250D of the
Corporations Act.
Application of law:
Proxy voting is provided for in s249X, which is a mandatory rule for public
companies. The proxy form is included at 27-600.
As AMGL is a public company, its members, such as canny, have the right to appoint
Larelle as proxy under s249X. Alternatively, as Canny is a body corporate, it could
appoint Larelle as its corporate representative.
The notice of AMGL’s AGM must include information about the process of
appointment: s249L. the proxy statement must be:
-
signed by the member
contain the member’s name and address, the name of the company, and the name or office held
by the proxy, and
specify the meeting or meetings for which the appointment is to apply: s250A of the
Corporations Act.
The notice must be sent to AMGL so that it is received at least 48 hours (or any
shorter period provided for in the constitution) before the meeting: s250B of the
Corporation Act.
5. Jason and Jennifer Jones would like more of a say in the affairs of SAFPL. They
would like to force a meeting of SAFPL to vote on a resolution to amend the
constitution of SAFPL to give A Class shareholder the right to vote on the
appointment of directors. They have asked David to convene a members’ meeting to
consider the resolution but he has refused, saying that it would be futile because he,
Nick and Patricia would never agree. Jason and Jennifer would like your advice on
whether the meeting can be held.
This question involves two separate issues. The first is: who can request or convene a
meeting? The second is: can a general meeting be called to discuss or pass resolutions
on business matters, for which decision-making power rests in the direction (not the
members in general meeting)?
Members’ meetings can be convened several ways:
-by the board of directors using general management powers. By the board of
directors at the request of members: s249D of the Corporations Act provides that the
board must convene a meeting of members when requested to do so by members with
at least 5% of the votes that may be cast at the meeting. The meeting must be called
within 21 days, and held within two months after the request is given to the company.
-a member or members holding at least 5% of tge votes entitled to be cast at the
meeting may convene a meeting at their own expense: s249F of the Corporations Act.
-by a single-director of a listed company (s249CA of the Corporations Act) or under
the internal governance rules (IGRs) such as s249C of the Corporations Act.
-by the court: s249G of the Corporations Act.
They together hold 1/6 of the voting power, so individually or toghther they hold
enough power to request a meeting under s249D. further, individually or together they
hold enough power to convene a meeting at their own expense under s249F.
As to the second question, they wish to consider a resolution pertaining to rights
attached to the shares and the constitutional change. These would normally be
considered to be matters under the control of the general meeting, as per the organic
principle (refer back to chapter 6) and the variation of class rights procedure (refer
back to chapter7).
6. Jason decides he can convene a meeting of SAFPL under s 249F of the
Corporations Act. On 20 January he sends a notice, by mail, to all of the ordinary
shareholders (except Steven, whose address he does not have) and eight of the A
Class shareholders (he does not have current addresses for the other two) saying that a
meeting will be held on 30 January at his home in Sydney ‘to consider and if thought
fit pass a special resolution to give A Class shareholders a vote on the election of
directors to the SAFPL board’. Those who cannot attend in person are invited to dial
in via Skype. Jason, Jennifer and four of their cousins attend the meeting in person,
and another cousin attends by Skype. On a show of hands, everyone votes in favour of
the resolution. Discuss.
Notice of meetings: notice must be given to all members and directors (s249J) and to
the auditor (s249K). the notice must comply with s249L:
-set out the place, date and time for the meeting (and, if the meeting is to be held in
two or more places, the technology that will be used to facilitate this); and
-state the general nature of the meeting’s business; and
-if a special resolution is to be proposed at the meeting—set out an intention to
propose the special resolution and state the resolution; and
-if a member is entitled to appoint a proxy—contain a statement setting out the
information about appointing the proxy.
Under s249L(3), the information included in the notice of meeting must be worded
and presented in a clear, concise and effective manner. The notice of meeting should
include sufficient information so that a member, on reading the notice, can decide
whether or not to attend the meeting (in person or by proxy) and, if so, whether to
vote for or against the proposed resolution: Residues Treatment & Trading Co ltd v
Southern Resources Ltd.
For unlisted companies, the minimum period of notice is 21 days, although the
company’s constitution may provide for a longer period of notice under s249(H). (this
notice period can be reduced by agreement of members holding at leaset 95% of the
votes that may be cast at the meeting, except where the company is a public company
and the meeting relates to the appointment or removal of a director or the removal of
the auditor.)
Problem set 8:
6. The constitution of SAFPL allows for the directors to pay a dividend to holders of
A Class shares at their discretion. Over many years the company had paid a dividend
which, although not sizeable, was sufficient for the shareholders who chose to do so
to live on it. However, David and his siblings are angry about the discontent that
Jason has been stirring up among the Henry grandchildren, some of whom they see as
lazy and undeserving. So the board of SAFPL resolves not to pay a dividend to the A
Class shareholders this year and, instead, to retain earnings to fund the development
of the organic farm in the Riverina. What action, if any, can the Henry grandchildren
take in respect of non-payment of the dividend?
At the meeting
For companies to which the replaceable rule in s249T of the Corporations Act applies,
the quorum requirement is two.
Under s249S of the Corporations Act, a company can hold a meeting of its members
in two or more venues using any technology that gives the members as whole, a
reasonable opportunity to participate.
The replaceable rule in s250J of the Corporations Act provides that a resolution put to
the vote at a meeting must be decided on a show of hands unless a poll is demanded.
Application of law:
As noted in problem set 4, question 5 above, Jason has the right, with 8% holding, to
call a meeting at his own expense under s249F. however, if you go through the
checklist above as to notice of meetings, Jason has made several significant errors in
the notice, for example:
-
he has not provided notice to all members, and what about directors?
There is insufficient time of the notice (only 10 days) and no evidence that 95% agreed to
waive 21 days’ notice.
There is nothing about proxies.
Section 232 allows the court to provide a remedy to a member if:
-
The conduct of a company’s affairs, or
An actual or proposed act omission by or on behalf of the company, or
A resolution, or a proposed resolution, of members or a class of members of a company.
Is either contrary to the interests of the members a a whole, or oppressive to, unfairly
prejudicial to, or unfairly discriminatory against, a member or members whether in
that or in any other capacity.
Who can apply:
An oppression action may be brought by:
-
A member of the company, even if the oppression action relates to an act or omission that is
against: the member in a capacity other than as a member, or another member in their capacity
-
as a member, or
A person who has been removed from the register of members because of a selective capital
reduction (selective capital reductions are discussed in chapter 20) or
A person who will cease to be a member of the company if the oppression action relates to the
circumstances in which they cease to be a member, or
A person to whom a share in the company has been transmitted by will or by operation of law,
or
A person whom ASIC thinks appropriate having regard to inestigations it is conducting or has
conducted into the company’s affairs.
What is oppression:
There is no one “test” for deciding whether there has been oppression, but where the
conduct complained of involves a decision by the board, courts have tended to apply
the formulation in Wayde v NSW Rugby League—was this a decision that no board
acting reasonably would have made?
Courts refer to the issue of the “reasonable expectations” of members – was thee a
common understanding or expectation among the members about how certain mattes
would be arranged, that has been departed from?
Remedies where there is oppression
Section 233 of the corporations Act allows the court to choose from a broad range of
remedies where the court finds that there has been oppression:
-
To wind up the company
To modify or repeal the company’s constitution (if it has one)
To regulate the conduct of the affairs of the company in the future
For the purchase of the shares of a member by other members or by the company
That the company commence or defend specific legal proceedings or authorizing a
member of the company to institute or defend specific legal proceedings in the name
and on behalf of the company.
Appointing a receiver, or a receiver and manager, of any or all the property of the
company.
Restraining a person from doing something.
Application of law:
The textbook gives examples of oppressive conduct, referring to “unfairly” restricting
dividends. Having regard to those examples, it is unlikely that the board’s dividend
policy would be considered oppressive, given there is no change in direction by the
company—see Thomas v H W Thomas Ltd. However, where directors have breached
their duty to act in the best interests of the company, this may amount to oppression –
see Re Spargos and Jenkins v Enterprise Gold Mines.
Tutorial 9
Problem set 5
1. At SAFPL, the relationship between David and Jason is becoming very
acrimonious. David says to Jason that he should ‘stop making trouble’ in the
company. David is confident that Patricia and Nick will always support him in
decisions relating to the company and that (because Steven never attends meetings of
SAFPL) he will always have enough votes to control the general meeting. So, David
tells Jason that if he keeps making trouble, he will ask his siblings to approve the
transfer of the profitable durum wheat business to a new company, in which the
Henry grandchildren have no financial interest. Could David, Patricia, and Nick pass
such a resolution at a general meeting of SAFPL?
Members of a company typically have a right to vote on matters such as:
-
the composition of the board of directors
Certain transactions affecting share capital
Variations of class rights
Adoption of and amendment to the internal governance rules.
However, even if members have the power to pass a resolution over a matter, there
are still limits on their powers. It is possible for members who are able to exercise a
majority of the votes in a company to use their voting power to exploit those members
who are the minority. To prevent this, there are principles referred to as the equitable
limitation on majority voting power. This means that the majority cannot make
decisions that are unfair or unreasonable to minority members.
The equitable limitation can apply to a number of action of the majority. However,
many of the cases that have come before the courts concern situations where the
majority have voted to amend the company’s constitution.
Examples not involving the constitution include:
-
Vote to approve the sale of assets of the company to themselves or inappropriately take away
the company’s assets: Menier v Hooper’s Telegraph Works
Vote to approve certain benefits to themselves than are not available to the minority: Biala Pty
v Mallina Holdings Ltd
3. The directors of China Investments Pty Ltd are Mr Chester and Ms Wu. China
Investments has not held a board meeting for several months. At a recent AMGL
board meeting, it was resolved to double spending on advertising to financial
institutions in China. Mr Eager instructed the country manager at China Investments
to arrange the advertising and she did. In these circumstances, could AMGL itself be
considered a director of China Investments?
Section 9 – the definition of “director” in the Corporations Act includes (in para b ii) a
person who is not validly appointed as a director, if the director of the company are
accustomed to act in accordance with the person’s instructions or wished.
In Standard Chartered bank v Antico, the court found that Pioneer International was a
“shadow director” of Giant Resources. The reasons for the decision are complex. But
the key factor seems to be that Pioneer exercised extensive management control over
Giant, effectively unsurping the Giant board. In other words, instead of the giant
board of directors debating and deciding issues relating to the management of the
company, these matters were decided by Pioneer and just communicated to Giant to
acted upon.
In Buzzle Operations pty Ltd v Apple Computer Australia Pty Ltd. White J reasoned
according to the following propositions regarding the definition of shadow director in
s9.
-
-
In some circumstances, it is possible for the one person to be both a shadow director and a de
facto director.
It is not necessary that the instructions or wished of the shadow director be given over all areas
of corporate activity for which the directors are responsible.
A person is not a shadow director merely because they impose conditions on their commercial
dealings with the company with the directors feel obliged to comply.
There must be a causal connection between the instruction or the wish of the shadow director
and the directors acting on it. It is not sufficient if the act that was specified in the instruction
is something that the directors would do, irrespective of the instruction.
For the directors to be “accustomed to act” in accordance with the instruction or wishes,
requires “habitual compliance over a period of time”, and
The directors collectively must be accustomed to act on the shadow director’s instructions or
wishes and it is sufficient of a “governing majority” of the board is so accustomed to act.
4. Before joining the board of AMGL, Frank Foster was an official in a trade union. A
recent investigation by Fair Work Australia into the affairs of the union at the time Mr
Foster worked there has resulted in allegations of misuse of union funds. There is a
rumor that several officials, including Mr. Foster, may be charged with criminal
offences punishable by more than 12 months’ imprisonment. XYZ Limited, a
shareholder in AMGL, wants Mr. Foster removed from the board of AMGL
immediately. Mr Foster is refusing to resign. Can his fellow directors remove him
from office? Can he be removed by AMGL’s members? Discuss.
Removal by directors.
It is not possible for directors of a public company to remove another director – see
s203E of Corporation Act
The situation is different for proprietary companies. It is possible for the constitution
of a proprietary company to have a provision that allows directors to remove another
director
Removal by members
In the case of a public company, s203D of the Corporations Act provides that
members may remove a director by ordinary resolution.
Disqualification:
Note that if the charges are ultimately successfully prosecuted against Mr. foster, this
will be grounds for removal by disqualification. Under s206B of the Corporations
Act, conviction of an offence that involves dishonesty and is punished by
imprisonment for at least three months, leads to disqualification
5. XYZ Limited decides to increase its stake in AMGL from 6.5% to approximately
16% and acquires an additional 16 million shares in AMGL on market. XYZ informs
the board of AMGL that it would like a seat on the board for Mr Xu, its majority
shareholder. Mr Xu lives in Hong Kong. Can the directors appoint Mr Xu to the board
of AMGL?
To be appointed as a director of a company, a person must satidfy four conditions
contained in the Corporation Act. The person must
-
Consent to the appointment (s201D)
Be an individual and not a company (s201B(1))
Be at least 18 years old (s201B(1))
Not be disqualified from being a director (s201B(2))
The members may appoint a director by passing an ordinary resolution: s201G of the
Corporation Act. It is also possible for the constitution of a company to allow the
director themselves to appoint additional directors, but this must subsequently be
approved by the members of the company: s201H of the Corporation Act.
In the new appointments, the board also needs to consider board size. Every
proprietary company must have at least one director, with at least one director
ordinarily residing in Australia: s201A(1) of the Corporation Act. Every public
company must have at least three directors, with at least two directors ordinarily
residing in Australia: s201A(2).
6. What procedural requirements must be followed to convene a meeting of the board
of AMGL to appoint Mr Xu?
The procedural rules that apply to board meetings of directors are typically contained
in the company’s constitution.
Board meetings can be called by any of the directors. With reasonable notice: s248C
of the Corporation Act.
Unless the directors decide otherwise, the quorum for a meeting of directors is two
directors, and the quorum must be present at all times during the meeting: s248F of
the Corporation Act.
Decisions at board meetings are usually taken by majority vote. Each director is
entitled to one vote, although it is possible for the company’s constitution to provide
that a director has more than one vote in some cirumstances. It is commom for the
constitution to provide that the chairperson of directors is to have a casting vote where
votes are tied.
Problem set 7
5. Patricia Henry attends an industry conference at which she meets an agricultural
scientist who is working on a process to extract value from the waste products of
feedlots. The scientist is very keen to enter a joint venture with a significant producer
to test and hopefully commercialize the technology. At Patricia’s suggestion, the
scientist prepares a proposal and presents it to the board of SAFPL. SAFPL is
impressed by the technology and the opportunity it presents for the business, but
because of the significant investment it is making in the organic farm in the Riverina,
is not able to take it up. After the meeting, Patricia phones the scientist and says that
she would like to invest her own money in the project. Patricia does not tell her fellow
SAFPL directors of her decision. Is Patricia allowed to make the investment?
The second conflict rules states that directors must not take corporate property,
information or opportunities without the permission of the company. A corporate
opportunity is a business opportunity that the company is considering or one in which
the company might reasonably be expected to be interested, given its current line of
business.
Section 182 states that a director, secretary, other officer or employee of a company
must not improperly use their position to:
-
Gain a advantage for themselves or someone else, or
Cause detriment to the company
Application of law:
The facts are in some respects similar to Canadian Aero Service Ltd v O’Malley, in
the sense that the company is unable or unwilling to act on the opportunity. Dose this
sufficiently sever the connection between the fiduciary duty and the company’s
opportunity? This may well still be a breach of duty byPatriciam as the courts have
strictly interpreted the corporate opportunity principle. In particular, it was due to her
position as director of SAFPL and while acting in that capacity, that she first came
across the contact and the opportunity—compare Peso Silver Mines. She cannot
resign to take up the investment.
A the courts are strict with this fiduciary duty, it appears that Patricia will be in
breach, even though SAFPL has chosen not to take up the opportunity see Regal
(Hastings)Ltd v Gulliver.
6. In addition to being a non-executive director of AMGL, Dr Dawes is a partner in a
consulting business that provides specialist advice to financial services on taxation
matters. Blue Ltd approaches Dr Dawes’s business partners to undertake a review of
the taxation position of JV Investor. The fee that is offered for the work will be paid
by JV Investor and is very generous — well above current market rates for the
equivalent work. Having regard to Ch 2E of the Corporations Act, would the approval
of AMGL’s shareholders be required before any agreement is made between JV
Investor and the consultants?
Chapter 2E prohibits a public company (or an entity that the public company controls)
from giving a financial benefit to a related party of the public company unless:
-
The financial benefit is exempt, or
The giving of the financial benefit is approved by the members of the public company: s208
Several issues need to be resolved:
-
Who is a related party? The relationship are set out in s228 of the Corporations Act
What is a financial benefit? Section 229 of the Corporations Act is interpreted broadly and
-
with regard to the commercial effect. Some examples of giving a financial benefit include:
Giving or providing finance or property
Buying, selling or leasing an asset
Providing or receiving services
Issuing securities or options.
When is shareholders approval required? Unless one of the exceptions applyssss
Tutorial 10
Problem set 9
3. In question 4 of Problem Set 7, we saw that AMGL failed to disclose to the market
the effect of the problems at JV Investor on AMGL’s likely financial performance.
What is the source of AMGL’s obligation to disclose that information to the market?
What happens if it fails to make timely disclosure?
Obligation to disclose
ASX Listing Rule 3.1 says that (subject to exceptions discussed below) once the
company is aware of any information concerning it that a reasonable person would
expect to have a material effect on the price or value of its securities (price sensitive
information), the company must immediately disclose that information to the market
(through an ASX announcement)
l
l
l
3.1 A.1: a reasonable person would not expect the information to be disclosed
3.1A.2: the information is confidential and the ASX has not formed the view that the
information has ceased to be confidential
3.1A.3: one or more of the following applies:
- it would be a breach of a law to disclose the information
- the information concerns an incomplete proposal or negotiation
- the information comprises matters of supposition or is insufficiently definite to
warrant disclosure
- the information is generated for the internal management purposes of the entity
- the information is a trade secret
ASX LR 3.1 is given legislative support by s674 of the Corporations Act, which
imposes statutory liability for contravention of the listing rule on the listed company
and anyone involved
Consequence:
The company:
l
l
l
Commits an offence under s1311 of the Corporation Act
Contravenes a civil penalty provision (see ASIC v Newcrest Mining Ltd)
Can have issued by ASIC, an infringement notice for breach, under Pt 9.4AA of the Act
A person (such as an officer of the company) who is involved in the breech (see s79)
by the company, contravenes s674 (2A)—a civil penalty provision – unless the person
can prove that he or she took all reasonable steps to ensure that the company complied
and believed on reasonable grounds that it was complying
If the company’s breach of the continuous disclosure requirement results from
directors’ negligence, those directors may be the subject of separate civil penalty
proceedings for breach of s180
4. The feasibility study for the organic lamb project indicates that several million
dollars will need to be invested in the first four years on plant and equipment. At the
first meeting of the board of SAOM, the directors discuss the various options
available to SAOM to fund that work. These options include asking SAFPL to
subscribe for additional shares in SAOM, or borrowing the money from SAFPL,
Henry family members or external lenders such as banks. What are the key
differences between debt and equity funding? What factors should the directors of
SAOM consider in making this decision?
understanding the main difference between equity and debt is important in addressing
the funding decision in companies
generally, debt ha the following characteristics:
-
The company is required to pay interest at an agreed rate whether its operations are profitable
The company is required to repay the principal at the end of an agreed term (the company may
sometimes repay the principal earlier)
The lender has priority over shareholders for repayment of the principal on a winding up
The lender is not a member of the company and has no membership rights such as voting rights
The capital provided is for a short or finite term, and there is an expectation that it will be
repaid before the company is wound up
Equity securities (shares) will usually have the following characteristics
-
-
The company can pay a distribution (in the form of dividends) during the company’s life only
out of profits and only if a distribution is recommended by directors
There is no expectation or requirement that the company will pay a distribution (in the form of
dividends) even if the company males a profit—the payment of dividends is within the
discretion of the directors
The shareholders will be entitled to repayment of their principal on a winding up only after all
other legitimate claims have been satisfied
The shareholders are members of the company and have the membership rights (such as voting
rights) conferred on them by the Corporation Act and the company’s constitution
The shareholders are entitled to share in any surplus assets on a winding up
The capital provided is long term, and there is no general expectation that it will eb repaid prior
to winding up
Application of law:
You will need to weight up these factors in the context of SAOM. The board of
SAOM will primarily need to determine the type of relationship it wants with
investors. Equity investors become members, with rights in the company, and can
control for example constitutional decisions and appointments or removal of the
directors, with a high expectation that their capital will earn interest as well as be
repaid at a specified time. Interest on debt will be treated as an expense. Overall, it
will depend on whether SAOM thinks it can generate a sufficient, immediate cash
flow from the capital to service the debt
6. SAFPL has two classes of shares on issue — ordinary shares and A Class shares.
Why would a company issue shares of different classes? What are the advantages and
disadvantages for SAFPL in structuring its equity capital in this way?
Companies issue shares of different classes to accommodate the different neess and
preferences of different types of investors
Directors of a company can decide the terms of issue for new shares. Although not
restricted to these matters, different classes of shares will generally be created where
the company wishes to issue shares with different rights in relation to:
-
Entitlement to dividends
Priority in relation to the payment of dividends
Voting rights
Priority in repayment of capital on a winding up
The right to share in surplus assets on a winding up
Different class rights can achieve the following operational objectives:
-
-
-
Entrench control in the hands of a particular shareholder or group of shareholders. This could
be done by creating two classes of shares, one of which has greater voting rights in a general
meeting or has other control rights such as the right to nominate one or more directors to the
company’s board
Issue preference shares that have manyn of the characteristics of debts such as the right to a
fixed distribution payable in priority to distributions to other shareholders and the right to a
repayment of principal at the end of an agreed term but that are treated as equity for the
purposes of calculating the company’s gearing ratio
Establish separate classes of shares, to be issued to the participants in a corporates joint venture
Issue shares that participate differently in the company’s profits. For example, in some family
companies, different parts of the company’s profits can be streamed to family members for tax
or commercial reasons.
Problem set 10
1. Having considered the various options for funding the organic farm, the board of
SAOM has decided on a mix of debt and equity. In order to raise additional cash for
its equity investment in SAOM, SAFPL decides to issue additional ordinary shares
and a new class of preference shares. SAFPL would like your advice on the legal rules
that govern the proposed offer and issue of new shares in SAFPL.
Preference shares typically have the following rights:
-
The right to receive a dividend, the amount of which is determined when the shares are issued
or by some formula agreed on issue
The right to be repaid the principal on a winding up in priority to ordinary shareholders, but
no rights to participate in any surplus beyond that amount
-
No right to vote unless dividends are in arrears, except on resolutions to reduce the company’s
capital or to wind it up, or at a class meeting on matters affecting their class rights
The important point to realize is that SAFPL will be issuing different classes of shares
The general rule is that the decision to issue new share is a decision made by the
board: s254B(1). The directors will decide the number of new shares to be issued, the
terms on which they will be issued, and the issue price. However, there are some
restrictions on the directors’ powers to issue shares.
Notifications: if the share issue goes through, the company must notify ASIC of the
details of the issue: s254X
Application of Law:
The board has the power to issue the shares. You should note that SAFPL’s case will
not be straight forward, such as:
-
-
-
SAFPL is a proprietary company so can’t breach its restrictions in s113. This means it can’t
issue shares if that would result in more than 50 members. Ir also can’t issue the shares in
circumstances requiring an disclosure document.
Proprietary companies might also be subject to the replaceable rule in s245D which states that
when issuing shares of a particular class, the directors of a proprietary company must offer
them to the existing members
As the preference shares are a new class of shares, the directors will need member approval:
s254 A (1)
2. Thinking back to the work we did on directors’ duties, what should the directors of
SAFPL do in deciding on the number of shares to be issued, the subscription price and
the identity of those to whom the shares should be offered?
In exercising their power to issue shares, directors must act in accordance with their
duties owed to the company. The impact of the duties to act in good faith in the
interests of the company, and to exercise power for proper purpose, in the context of
share issues is discussed in length in chapter 13
Application of law:
You are told that the board of SAFPL wants to raise capital to fund its investment in
SAOM. It is a proper purpose to issue shares to raise capital for new ventures
(Woodside Oil case) so this would appear to be for a proper purpose
As explaned in chapter 16, the exercise by the directors of the share issue power for
an improper purpose may give a member a personal remedy under the principles
established in Residues Treatment & Trading Co Ltd v Southern Resources Ltd
4. JV Investor is in some financial difficulty because of the problems with the
blockchain project. Nevertheless, the two shareholders, AMGL and Blue, are hoping
to receive a dividend. Although JV Investor did not make a profit in the financial
year, its directors decide to pay a dividend of $0.04 per share. Is this allowed? If the
payment of the dividend causes JV Investor to become insolvent, what are the
consequences for the directors of JV Investor?
A longstanding rule of company law was that companies may pay dividend only out
of profits. This rule has been replaced by s245T of the Corporation Act
A company may not pay a dividend unless:
-
The company’s assets exceed its liabilities immediately before the dividend is declared and the
excess is sufficient for the paymet of the dividend
The payment of the dividend is fair and reasonable to the company’s shareholders as a whole
The payment of the dividend does not materially prejudice the company’s ability to pay its
creditors
You may wish to note that there is some controversy whether the former “profits” test
has been replaced by the new s254T. first, it is not clear that the requirement to pay
dividends only out of profits has been abolished by the new section, particularly if
such a requirement exists in a company’s constitution. The new section says that
dividends cannot be paid unless the three conditions are met. It does not say that a
dividend can be paid (regardless of whether it is out of profits or not) if those three
conditions are met.
Application of law:
You need to check each of these criteria, but there is probably not enough information
for a conclusive answer.
If the company is insolvent when it pays a dividend, or the payment of the dividend
causes its insolvency, the directors may be personally liable under s588G of the
Corporation Act, paying a dividend is deemed by s588G(1A) to be incurring a debt.
Recall that directors’ liability for insolvent trading is covered in chapter 12 1.
Tutorial 11
Problem set 11
1.The proposal at AMGL to raise additional capital through a private placement of
shares to the directors is not going ahead. Instead, the board of AMGL has decided to
conduct a further public offering (FPO) of shares. The offer is not a rights issue. What
disclosure and other requirements apply, under Ch 6D of the Corporations Act, to the
offer?
The main requirement in s706 requires all issues and offers of new securities to have a
disclosure document, unless exempt under s708.
Depending on the size or nature of the offer, the issuing company will be required to
prepare a prospectus, ie. an offer information statement: s705. And OIS is limited to
$10m: s709
Section 710 contains a general disclosure requirement that applies to most
prospectuses. It states that a prospectus issued in connection with an offer of securities
for subscription must include all the information that investors and their professional
advisers would reasonably require to make an informed assessment of:
-
The rights and liabilities attaching to the securities
The assets and liabilities, financial position and performance, profits and losses and prospects
of the company
A prospectus must also include certain specific items of information, under s711.
These include information about the terms and conditions of the offer, and disclosure
of the interests of, and fees payable to, certain people involved with the offer. The
information in a prospectus must be worded and presented in a clear, concise, and
effective manner: s715A
More limited disclosure requirements apply where the offer relates to ASX listed
securities
To reflect this fact, s713 provides for a more limited disclosure requirement for these
offers. It requires that the prospectus contain all the information investors and their
professional advisers would reasonably require to make an informed assessment of:
-
The effect of the offer on the company
The rights and liabilities attaching to the securities
Application of law:
Based on what you know, the FPO would fall under the general rule in s706 and none
of the exceptions in s708 would apply.
AMGL would need to prepare a prospectus under s710 and s711. An OIS probably
does not apply. However, because AMGL is listed, the prospectus disclosure
requirements would be more limited.
2. Despite a lengthy due diligence process, the prospectus issued by AMGL materially
misstates Manager’s funds under management, and therefore its future revenue. What
liability, if any, do the directors have to people who subscribed for shares under the
offer if the shares are worth less than the prospectus led them to believe?
Section 728(1) of the Corporations Act says that a person must not offer securities
under a disclosure document if there is:
-
A misleading or deceptive statement in the disclosure document, any application form, or any
offering document.
An omission from the disclosure document of material required
A new circumstance that has arisen since the document was lodged that would have required
disclosure
If a person subscribes for securities on the basis of a defective disclosure document,
they have remedies against the company and other involved in the preparation of the
document, under s729
Under s729 a person who suffers loss or damage because of defective disclosure can
claim against a number of defendants, including the company and its directors, for the
defects in the disclosure document.
There are defenses for directors
Application of law:
The investors have a right of action under s728, for a misleading statement in the
prospectus, AMGL and its directors are liable, unless they can establish a due
diligence defense under s731. It is a defense to liability if the person made all
reasonable enquires, and reasonably believed that the statement was not misleading
was not misleading or deceptive, or that there was no omission
3. AMGL is negotiating with an ASX-listed investment management company,
Squillians Limited, to buy a large part of Squillians’ business (all of its fixed interest
business, which generates 80% of Squillians’ profits each year). Ricardo is an
accountant who is part of the external team advising AMGL on the transaction. Three
weeks before AMGL announces the transaction, Ricardo tells his football teammate,
James, that AMGL is planning to buy a significant part of Squillians’ business. One of
the players on the other team, Philippe, overhears the conversation. Three days after
the conversation, James buys 5,000 Squillians shares and then Philippe buys 7,000
Squillians shares the following day. Have Ricardo, James or Philippe committed
insider trading?
Insider trading laws cover three separate offences:
-
The tripping offence
The trading offence
The procuring offence
The tipping offence occurs where an insider communicates inside information to
another person who the insider knows or ought to have known would be likely to buy,
sell or otherwise trade in those shares or procure a third party to buy, sell or trade in
those shares
The trading offence occurs where an insider buys, sells or otherwise trades shares in a
company(s1043A(1)).
The procuring offence occur where an insider procures another person to buy, sell or
otherwise trade shares in a company(see s1042F)
4. As an alternative to buying the fixed interest business of Squllians, AMGL
considered buying 35% of Squillians’ shares on the ASX. Is it permitted to do this
under Ch 6 of the Corporations Act? What are two mechanisms that would enable it
to do so?
S606 of the Corporations Act contains a general prohibition on acquiring shares in
publicly listed companies. The section prohibits a person acquiring a relevant interest
in a company’s voting shares through a transaction in relating to securities if, because
of the transaction, someone’s voting power in the company increases
-
From 20% or below to more than 20%, or
From a starting point that is above 20% and below 90%
Additional question
On 1 April 2014 Wang Xiaofeng owns 3% of the shares in Portia Ltd. In August he
increases his holding to 15%. In September a company, Lioness Holdings Ltd, (a
company in which Wang Xiaofeng owns 51% of the shares), buys 5% of Portia Ltd.
In November Wang Xiaofeng enters into an arrangement with Melody Mount
whereby Wang Xiaofeng acquires an option to purchase the shares in Portia which are
held by Melody. Melody holds 3 % of Portia’s shares. Wang Xiaofeng does not intend
to exercise the option because the exercise price is higher than the market price.
Advise Wang Xiaofeng whether any or all of these transactions have complied with
the takeover provisions of the Corporations Act.
Section 608: situations giving rise to a relevant interest
15% portia (no breach of 606)
Lioness Holding Ltd, a company in which Wang Xiaofeng owns 51% of the shares,
buy 5% of Portia Ltd, 5% is a relevant interest(608(1))
20% Portia (more than 20%=no breach of 606)
Enters into an arrangement with Melody Mount whereby Wang Xiaofeng acquires an
option to purchase the shares in Portia which are held by Melody. Melody holds 3%
of Portia’s shares. 3% is relevant interest (608(8)(b)(iii))
23% in breach of s606
Section 611: exception to the prohibition
Problem Set 12
The following questions should be answered after you have read Chapter 23.
1. SAFPL has been considering buying a major new piece of feeding machinery for
the sheep. The machinery costs $5 million. SAFPL’s board of directors has not yet
made a final decision to buy the machinery. Would a contract to buy the machinery be
enforceable by the machinery manufacturer if the contract was executed:
(a) by being signed by David Henry for and on behalf of SAFPL
(b) by being signed by Nick Henry for and on behalf of SAFPL
(c) by the SAFPL common seal being fixed in the presence of, and witnessed by, Nick
Henry and Patricia Henry
(d) by being signed by Nick Henry and Patricia Henry
(e) by being signed by David Henry and his dentist Richard Prais (Richard does not
work for SAFPL).
Contracting by a company requires both formal authority and substantive authority
Under s127(1) of the corporation act, a company (whether or not it has a seal) can
execute a document by having the document signed by:
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two directors
a director and a company secretary, or
if it is a proprietary company that has asole director who is also the sole company secretary,
then that director
s127 gives formal authority to sign documents. To establish substantive authority (in
the absence of a board resolution) the party to the contract would need to show that
the officers or agents have enough actual or apparent authority to bund the company.
There are two types of authority that an agent of a company might have:
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actual authority
apparent authority
(a). SAFPL is not a single-director company. David is not a sole director of SAFPL,
so the contract having been made directly by the company under s127 on that basis.
However, while David does not have formal authority to sign by himself under s127,
he is the managing director of SAFPL. Does he have substantive authority?
While the appointment of MD will normally invo.ve express actual authority, even
where there is no express list of delegated power, the court have said that the mere
fact of being appointed to this position involves a grant of implied actual authority to
do all such things as fall within the usual scope of that office: see Hely-Hutchinson v
Brayhead Ltd
A managing director’s usual function include dealing with everyday matters,
supervising the daily running of the company, supervising t=ither senior managers
and generally being in charge of the company’s business (see Entwells pty Ltd v
National and General Insurance Co Ltd), but do not include entering a transaction that
is outside the ordinary trading transaction (see Corpers Pty Ltd v NZI Securities
Australia Ltd) or selling the company’s main business
The transaction of purchasing the machinery would fall within the MD’s usual
functions as the machinery is worth $5 million, a fraction of the annual revenue of
$78 million, so it would be within an MD’s authority
(b). as one of four directors, Nick is in the same position as David. He does not have
formal authority to sign by himself under s127, does he have substantive authority?
Actual authority could be express or impled. The coard hasn’t mde a decision yet, so
you can see that Nick does not have express actual authority to sign the contract.
Implied authority can arise several ways through the implied powers that attach to a
particular office or position (customary authority) or by acquiescence.
As regards customary authority, a director acting alone has no implied actual
authority to bind the company in contracts with outsiders: see Brick and Pipe
Industries Ltd v Occidental Life Nominees Pty Ltd.
Implied actual authority by acquiescence flows from the conduct (or lack of conduct)
of the board of directors if it has in the past acquiesced to a director’s earlier actions
in taking control: Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd
(1992). Acquiescence means the board has knowledge and has consented to this
action
Nick would not have customary authority as a single director, nor are the
circumstances of acquiescence on these facts
(c). This contract complies with s127 –signed by two directors and under the common
seal of SAFPL, hence it is made directly by the company. On one interpretation,
defects in both of these types of authority may be overcome by the statutory
assumption in s129(6) of the Corporations act where the common seal has been used
An alternative view is that the statutory assumptions in s129(5) and (6) relate only to
formal authority. Under this view any defect in substantive authority must be
overcome in some other way. For example, the outsider may rely on common law
agency principles, to show that a person who dealt with them on behalf of the
company had implied actual authority or apparent authority to commit the company to
the transaction in question
If s129(6) applies, then any purchaser can assume that the contract has been validly
signed. Further, any purchaser can assume Nick and Patricia are directors if their
names appear as directors in the ASIC database, using s129(2)
You may wish to note that any seller’s ability to rely on the statutory assumptions will
be limited by s128(4), whether they knew or suspected that the outsider knew or
suspected that the SAFPL board had not actually passed the resolution to purchase the
machinery. Although there are no facts provided, it would have to be quite unusual
circumstances for an ordinary seller in this situation to have knowledge or suspicion
about the conduct of SAFPL’s affairs.
(d). this situation remains the same as in (c), as it is still legitimate under s127 for a
contract to be signed by two director without a common seal
The relevant statutory assumption for establishing formal and possibly also
substantive authority) would be s129(5) rather than s129(6), but otherwise the answer
is the same as for (c).
If s129(5) applies, then any seller can assume that the contract has been validly
signed. Further, any seller can assume Nick and Patricia are directors if their names
appear as director in the ASCI database under s129(2)
(e). David is a MD of SAFPL, you saw in (b) that he does not have formal authority to
sign by himself under s127. Richard is not an officer of SAFPL so he does not have
formal authority to sign under s127 either. Does he have substantive authority? There
is no information provided as to Richard’s role, but on the surface there is no reason
why the MD’s dentist should have any involvement in the company’s management. In
the absence of persuasive facts to the contrary, he does not have authority.
Further, any seller would not be able to rely on the indoor management rule as they
could not assume under s129(2) that Richard is an officer, as he is not on the ASIC
registers. You could look at the Fiberi case, where Mr Doyle’s sone, who was not an
officer, signed the document. The difference in our case is that David is MD (u like
Mr Doyle) and we established in part(b) that the MD probably does have substantive
authority to sign anyway.
2. Would your answer in any case be different if, unknown to the purchaser, SAFPL
had a constitution and clause 48 of the constitution said ‘a proposed expenditure of $4
million or greater must be approved by ordinary resolution of the shareholders in
general meeting’, and this has not been obtained?
3. Would your answer to 1(a) be different if David Henry had never formally been
appointed as managing director, although he acted with the consent of the other
directors in that capacity?
You saw in both parts(a) and (b) how substantive authority can be either actual
authority or apparent, and that actual authority can be express or implied. Implied
authority ca. arise several ways through the implied powers that go with a particular
office or position (customary authority) or by acquiescence
As regards customary authority, a director acting alone has no implied actual
authority to bind the company in contracts with outsider: see Brick and Pipe
Industries Ltd v Occidental Life Nominees Pty Ltd.
As regards authority by acquiescence, this implied actual authority flows from the
conduct (or lack of conduct) of the board of directors if has in the past acquiesced to a
director’s earlier actions in taking control: Brick and Pipe Industries Ltd v Occidental
Life Nominees Pty Ltd. Acquiescence means the board has knowledge and has
consented to this action
Here, you are given facts that suggest that in the past, the board of SAFPL has
acquiesced to David taking control – hence you could argue that similar to the Brick
& pipe case, David has the implied actual authority of managing director. Provided
that purchasing the feeding machinery is within the usual scope of running the
business, then the answer remain the same that the company is still bound by the
contract.
4. Would your answer to 1(e) be different if David Henry had introduced Richard
Prais to the CEO of the machinery manufacturer as a director of SAFPL?
Here the problem is concerned with Richard’s substantive authority. In part(e), you
probably concluded that Richard didn’t have any substantive authority. Substantive
authority can be either actual authority or apparent
You are not told that Richard is the secretary, merely that he has been introduced as
such. The introduction amounts to a representation – but can it be attributed to the
company?
There are three requirements for an agent to have apparent authority to act for a
company (see Freeman & Lockyer v Buckhurst Park Properties Ltd and CrabtreeVickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd)
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a holding out
by someone with actual authority
on which the other person relied
based on the Brick & Pipe case, such an introduction could amount to a representation
binding on the company, so you could conclude that David has customary authority as
MD and Richard has customary authority by being represented as secretary.
Problem Set 13
1. Despite promising beginnings, the organic farm in the Riverina is not a success.
Four years after it is registered, SAOM becomes insolvent. SAOM’s directors, David,
Nick and Peter, hold a board meeting and appoint an administrator. NationsBank,
which has loaned $7 million to SAOM and is owed five months’ worth of unpaid
interest on the loan, has a circulating security interest over the inventory of SAOM.
Under the terms of NationsBank’s security instrument, the ‘event of default’ list
includes the appointment of an administrator. What can NationsBank do to recover
the unpaid interest or to enforce its security?
Appointment of voluntary administrator
The directors can vote in favour of this resolution when they have formed the opinion
that the company is insolvent or likely to become insolvent: s436A of the
Corporations Act
Position of secured creditors in voluntary administration
During a voluntary administration a secured creditor can’t enforce its security without
the written consent of the administrator or the leave of the court (s440B) or unless
their situation is covered by s441A or s441B or s441C
A secured creditor who has a security interest in all or most of the company’s
property or a security interest in perishable property, has some additional rights in a
voluntary
If the secured creditor starts to enforce their security interest before or within the
decision period, as defined in s9(ie 13 business days from the date the administration
begins or the date that a secured creditor is given notice under s450A(3)), they can
contine to enforce that security interest” s441A of the Corporations Act
If a secured creditor does not commence enforcement before or within that 13-day
period, they are prohibited from enforcing it during the administration period unless
the administrator consents in writing or the court gives leave: s440B
Secured creditor appointing its security
Normally, the instrument of charge between the company and secured creditor will
give the secured creditor the power to appoint a receiver at any time after the loan
secured by the charge becomes payable. The instrument of charge usually also says
that the loan becomes payable, if the secured creditor wishes, when an “event of
default” occurs. Therefore, when an event of default occurs, it “triggers” the power to
appoint a receiver. The receiver is both an agent of the company and acts on behalf of
the secured creditor to take control over the secured assets, with a view to managing
or selling those assets to repay the debt under the charge
Application of law:
It will need to be determined whether the security held by NationsBank is a charge
over the whole or substantialy the whole of the company’s property. If so, which
seems likely, NationsBank will have the decision period of 13 days within which to
decide whether to enforce the charge by appointing a receiver to take control of the
inventory of SAOM.
At the end of the voluntary administration, as a secured creditor over most of the
company’s properly who has not enforced its security before or during the decision
period of 13 days, the bank may then enforce its security, provided that it has not
agreed to a deed of company arrangement, s440C sets out the restrictions on third
party rights over company property during the administration of a company
The most valuable asset is likely to be the land, the bank would have more than just
one security document (mortgage over the farm property and the fixed charge over
assets) but if it has a $7 million loan it is likely to be the major secured creditor over
most of the assets of the company anyway. Note that as a secured creditor it could just
choose to exercise its rights under the security, and banks would generally do that
rather than surrendering their security to the receiver.
2. At the second creditors’ meeting, what factors would make SAOM’s creditors
favour a winding up and what factors would make them favour a deed of company
arrangement?
Within 20 business days of the administration beginning, the administrator must call
the second meeting of creditor: s439A. the creditors can choose between the three
options for the company’s future
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entering into a deed of company arrangement
returning management to the directors by ending the administration, or
winding up the company
the decision is voted on by the creditors through a poll. On a poll, the resolution is
passed only if a majority in number (that is, more than half of the creditors) and a
majority in value (that is, creditors who between them are owed more than half of the
money) vote in favour.
The creditors’ decision is assisted by a report prepared by the administrator. The
report must include the administrator’s opinion (with reasons) on whether it would be
in the creditors’ interests for any of the three options to be adopted: s439A(4). In
effect, the administrator recommends one of the three options and must disclose any
information know to them that will enable creditors to make an informed decision
3. What happens if SAOM’s creditors decide, at the second creditors’ meeting, to
execute a deed of company arrangement? What role will David, Nick and Peter have
in running SAOM’s business?
4. Nine months before the administrator was appointed, SAOM sold some of its
farmland to Peter for $600,000. A local real estate agent valued the land at that time
and the report concluded that the land was worth $750,000. Could this be one or more
of the voidable transactions that involves an insolvent transaction?