LAW3111 Equity Semester 1 2023
Week 12 Seminar Exam Revision
Question
David, Jessica and Grigor are the three directors and shareholders of Gigantic Enterprises Pty
Ltd (GE), a small venture capital firm. GE’s business model is to find small new businesses
that need to raise capital, and to match those businesses with investors, or groups of investors.
GE charges the businesses it finds a 10% fee based on the amount of capital raised.
Sometimes, GE itself acts as the investor.
Each director has a contract with GE. Under the terms of the contract, directors are permitted
to invest personally in businesses being promoted by GE, on giving notice to the board of
directors, and gaining board approval.
In 2020, during the lockdown, one of GE’s previous clients, Michael, got in touch with Grigor.
He had obtained a patent for making personal safety equipment via the use of new technology,
and wanted to appoint GE to raise the capital needed to start production. Grigor examined the
proposal. He immediately saw a modification for the technology that had not apparently
occurred to Michael: Grigor could see how the technology could be used to make personalised
safety equipment guaranteed to fit its wearer. With no end to the Covid-19 pandemic in sight,
Grigor was sure a fortune was to be made.
Grigor told Michael that, on this occasion, it would be best if Grigor raised all of the necessary
money himself. Michael knew that sometimes in the past, Grigor had invested personally in
businesses promoted by GE. Grigor did not tell David or Jessica about the investment.
Grigor and Michael set up a company to manufacture the equipment, Perfect Personal
Protection Equipment Pty Ltd (PPPE). Each took 50% of the shares. Michael kept personal
ownership of the patent, but allowed the company to use it. Grigor contributed capital. The
company was moderately successful in 2020. It made profits of $200,000 (largely due to
Michael’s efforts in selling the equipment to hospitals), and returned half of those profits to
Grigor.
(a) Advise GE what rights and remedies may be available against Grigor. (20 marks)
Now assume the following facts:
At the end of 2020, Grigor told Michael that he didn’t believe the business of PPPE would be
really successful, and that it would be best if the patent was sold, and the company wound up.
He told Michael in January 2021 that he had found a buyer prepared to pay $40,000 for the
patent. Michael agreed the patent should be sold and the company disbanded. The company
ceased trading on 1st February, 2021.
In fact, the buyer of the patent was Grigor’s friend Emil. Grigor had explained to Emil that he
wanted to get control of the patent to use it to make better equipment. Emil agreed that Grigor
could carry out all the transactions in his name. Sale of the patent was finalised on 1st April
2021 and Emil promptly transferred the patent to Grigor. The real value of the patent was at
least $100,000.
(b) Advise Michael what rights and remedies he might have against Emil. (15 marks)