Question1:
What types of companies can be formed under the Corporations Act? What are the key features of each?What is a promoter? What do they do? Explain the nature of the duties promoters owe to the company they are forming.Sylvia and Tome decided to form a new company. They approached Ralph, an accountant and a friend to complete the registration process for them. Ralph agreed to do so, in return for a small parcel of shares that Ralph would be free to do with as he pleased after the company was formed. Sylvia and tom also asked Ralph about finding investors for their new company. Ralph offered to talk to tow of his clients that he knew were looking for investments. Sylvia and Tom agreed to pay Ralph an additional amount of 3% of the amount invested by Ralph’s clients once the company is registered. Tom also asked Ralph to keep an eye out for suitable office space for the company Ralph owned a two –story office building from which he carried on his accounting business, and suggested Sylvia and tom that they rent part of the lower floor of the building as office space from him, on behalf of the proposed company at $500 per week. This rental price is $100 per week more that the actual rental value of the property. Advise Ralph as to what his relationship to the new company is, and whether he could face liability if Sylvia and Tom discovered the extra profit he was making from the rental of the office premises.
Constituting and managing companies:
The types of companies which can be formed under the Corporations act are Proprietary and Public companies. The main features of the Proprietary Company are that it must have minimum one member and maximum 50 non employee shareholders. The proprietary companies are unlisted companies by definition as they are not allowed to raise capital that would require lodging a prospectus, but these companies can hold shares in listed companies.The main features of Public companies are that it requires minimum of one member but there is no limit of maximum members. Public companies can be listed or unlisted and they can own Pty Ltd companies and they can raise capital by offering a prospectus.A promoter is a person who completes the preliminary work incidental to the formation of the Company. A promoter is a person who craves the people to invest money in a company when the Company is being formed. The nature of duty that promoters owe to a company is fiduciary in nature and of utmost good faith.Relationship of Ralph with the new company is that of a Promoter. Ralph will be liable for charging extra rent for the property to the company and will be liable to return the rent which he has charged extra.
Discussion Board
The promoter signed the lease of property before the registration of the Company it is a pre-incorporation contract. In this type of contract company is not liable as a principal because the Company has not yet come into existence. The promoter shall be liable personally.For starting a new Company a form no 201 has been provided at asic.gov.au which is described as an application for registration as a new Australian Company to be registered under corporation act 2001 section 117 (1). It needs to be submitted with a prescribed fee and required documents like incorporation certificate and a constitution of the Company.
What is a proxy? Why are they used?What are the common law rights of a member? What rights are still available or useful in light of statutory development in the area of member’s rights?Design a table or flow chart to summarise the statutory legal rights given to members and how they work.Discuss the following statement – “a share is a personal property however a shareholder may experience difficulty defending the value of her shares”.
A proxy is a person who attends a general meeting and votes in place of a member of the company. It is a right of every member to appoint a proxy.The member of the company has the right to attend meetings and vote for passing a resolution. These rights are the rights which are provided by the common law. The right to vote and participate in general meetings is available even in the light of the legal development of member’s rights.As the shares are issued by the companies as personal property of the shareholder, but the shares are liable to be forfeited by the company. The value of shares depends upon the business of the company which is run by the directors of the company. That is the reason the shareholders face difficulty in defending the value of their shares.
Issues:
There are five members in the company each having 20% shares.An extraordinary meeting was called by a member through a message from his mobile phone.Three members attended the meeting while the one other member attended through a conference call on his mobile but one member was not able to attend the meeting.At the meeting resolution was passed by all the members present to buy the shares of the member who was absent. He had been absent from the last six meetings also.The agreement between shareholders provided that any member who is absent from 3 meetings will sell his shares to other members.
Relevant laws:
Power to convene: it is provided in part 2 of the corporation act 2001 that a meeting of members can be called by a director or a board or by directors on request of members or by a member or members and by the court.Notice: the corporation act 2001 provides that as a general rule notice of meeting must be given 21 days prior to the day of the meeting, but provides that a meeting can be called on shorter notice if the members participating agree to it.Quorum: it is provided in section 249T (1) that the quorum for the meeting is minimum of 2 members.Voting: section 250E provides that when voting is held by show of hands each member has one vote which he can cast.Resolution: section 249A provides that a resolution can be passed even without a meeting if the members sign a document giving consent to the resolution to be passed.Technology: section 249S provides that a meeting can be held at two different places by the use of a technology that gives a member as a whole reasonable opportunity to participate.Rights of Dissenting members: the dissenting members of a company are to be paid a fair price for the value of their shares in the company.
Analysis of the case:
The consenting members argued that they had given a reasonable opportunity to the member to participate in the meeting. The agreement also provides that if a member does not attend three meetings he shall be bound to sell his shares to other existing members.The arguments of non participating member are that a valid notice about the meeting was not circulated due to which he was not able to attend the meeting.
Conclusion:
The non participating member has to sell his shares on a fair price as the argument that a notice was not circulated 21 days prior to the meeting will not hold a good ground as a resolution can be passed even without a meeting with the consent of all the members. The provisions of shareholder agreement also have been violated.
What are the common law legal rights of a member?Outline the division of power between the different corporate organs.Read Gambotto case – What are the facts of the case? What was the decision? What is the legal principle in this case to be applied to future cases similar to Gambott.Design a table or flow chart to summarise the statutory legal rights given to members and how they work.
The common law rights of a member of a company are to participate and vote in general meetings of the company. The members have a right to claim a share of the profit of the company and access to the accounts of the company.The powers to regulate and maintain a company has been divided over the different corporate organs under the corporation act. The power to appoint the directors is vested in the shareholders while directors are empowered to forfeit the shares.Gambotto case: the facts of the case are that 99.7 % of issuing capital of WCP was owned by subsidiaries. The IEL group wanted to acquire all the shares as this would lead to tax benefits. They sought to acquire the minority shares by altering WCP’s articles of association. Two Minority shareholders objected to this alteration. The lower courts held the alteration of the articles of association of WCP was invalid as it amounted to the unjust oppression of dissent shareholders. Whereas, the appellate court rejected this plea. The high court allowed the appeal of the minority shareholders and strengthened their position. The rule laid down in this case was that alterations of articles giving rise to a conflict of interest between shareholders but not involving an actual expropriation of shares. According to the joint judgment, such alterations are valid unless they are ultra vires or beyond the objective as provided in the articles of association.
Issues:
Analysis of the case:
In this case the majority members argued that the default member has set up a rival business which can cause loss to the business of the company. The default member is bound to sell shares as a special resolution has been passed by the other four members of the board.The default member argues that this is the oppression of minority as in the case of Gambotto. As held by the high court the interests of the minority shareholder are to be protected and it will be expropriation of the property of the minority shareholder.
Conclusion: it is concluded that as per the Gambotto case the default shareholder will be able to invalidate the resolution.
Following on from last week, the company is now insolvent. The liquidator has uncovered a number of decisions made by the managing director in the months leading up to the company becoming insolvent, which she is going to further investigate. For instance, she discovered that the managing director:
1. spent $250,000 on new computer systems;
2. purchased shares in a ski lodge valued at $300,000; and
3. bought a $250,000 on a car.
During the investigation, the liquidator found an e-mail from the financial controller of the company to the managing director that the company is unable to continue to support further purchasers without increased sales.Did the managing director breach any of his duties?Did the board of directors breach any of their duties?
The resolution was passed by an appropriate quorum for expansion of the business for Gemsales Pty. The Corporation Act 2001 provides legal duties of directors. The directors have a duty to exercise his powers and discharge his duties with care and diligence. In this case the consenting directors have breached their duties of acting with care and diligence. Brian is liable for breach of his duties as a director as he used his personal interest over the business of the company and formed a new company for his personal benefit of the clients of the company and also he had consented for the over expansion of the company due to which later the company had become insolvent. Brian was a major shareholder in Traders Pty Ltd from whom warehouse and showroom were bought for 1 Million $.
Issues
Relevant laws
Duty to prevent insolvent trading: it is the duty of directors to prevent the company from being insolvent. Section 588G of the corporation act provides that the duty comes into effect if the person was a director of the company when a debt was taken and the company has become insolvent by incurring that debt, also the director had reasons to believe that by incurring the debt company would become insolvent the director is said to breach his duty.The defenses available for the breach are provided in section 588H of the corporation act. The grounds of defense can be that the director had reasonable ground to expect that the company was solvent and will remain solvent after incurring the debt and he reasonably relied on the information provided by others or the director had taken reasonable steps to prevent taking the debt.The managing director of the company breached his duties under section 588G of the corporation act. As he was the managing director of the company when the debt was incurred and had reason to believe that such a huge debt shall not be repaid as the sales of the company were not going well. He also ignored the email from the financial controller about the financial condition of the company.
Conclusion: it is concluded that the managing director will be liable for his breach of duty under section 588G of the corporation act.
References
Asic.gov.au,. (2014). Minimum officeholders | ASIC – Australian Securities and Investments Commission.
Austlii.edu.au,. (2014). CORPORATIONS LAW- SECT 198ESingle director/shareholder proprietary companies.
Legal, B. (2007). Directors & Shareholders Rights & Obligations. Behanlegal.com. Registeracompany.com.au,. (2015). Company governance – Register a Company Australia. Coopers, P. (2005). Corporate Governance Toolkit for small and medium enterprises (1st ed.). Australia.
Asian-pacific brief: Australian corporate law. (1993, Apr 06).
Asian Wall Street Journal. Research and markets; law, corporate governance and partnerships at work: A study of australian regulatory style and business practice. (2012). Economics Week, , 601.
Gisbert, A., Navallas, B., & Romero, D. (2014). Proprietary costs, governance and the segment disclosure decision. Journal of Management & Governance, 18(3), 733-763.
How, J., Khoo, I., Ng, H. G., & Verhoeven, P. (2002). INTERNATIONALISATION AND CORPORATE GOVERNANCE: AUSTRALIAN EVIDENCE*. The Asia Pacific Journal of Economics & Business, 6(1), 42-63,126-128.
Pham, P. K., Suchard, J., & Zein, J. (2008). Corporate governance and alternative performance measures: Evidence from australian firms. Rochester: Social Science Research Network. Ramsey, I. M. (1995). Enforcement of corporate rights and duties by shareholders and the australian securities commission: Evidence and analysis. Australian Business Law Review, 23(3), 174.
Schwartz, M. (2007). Corporate responsibility and australian business: Identifying the issue. Australian Journal of Social Issues,42(3), 419-426,286.
Suchard, J., Pham, P. K., & Zein, J. (2012). Corporate governance and the cost of capital: Evidence from australian firms. Rochester: Social Science Research Network.
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