APPLIED CORPORATE LAW

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© Governance Institute of Australia /2021

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APPLIED CORPORATE LAW

SUPPLEMENTARY MATERIAL

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SUPPLEMENTARY MATERIAL

CONTENTS

Introduction SM – 1

Guidance about learning strategies and time allocation SM – 1

Caution note SM – 2

Introduction to the master case study SM – 2

Classroom SM – 3

Discussion questions SM – 3

Directors’ and officers’ duties SM – 3

Minority protection SM – 4

Fundraising SM – 5

Annual reports and financial disclosure SM – 6

Australian Securities and Investments Commission SM – 7

Membership rights and revision questions SM – 7

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Supplementary material

© Governance Institute of Australia /2021 SM – 1

INTRODUCTION SM

These supplementary materials have been written to provide additional support for those students who are enrolled in the Applied Corporate Law subject.

These supplementary materials consist of four separate but complementary elements, which form part of the learning strategies:

• guidance about learning strategies and time allocation

• master case study

• classroom

• discussion groups.

GUIDANCE ABOUT LEARNING

STRATEGIES AND TIME ALLOCATION

The subject has been designed in such a way as to enable you to complete it over a three month period with consistent work and application. Although you are free to work at your own pace and convenience, the following study pattern is suggested:

• Aim to complete one module per week. Although there will be individual variations when more time will be required, each module should take an average of six hours to study.

• Read the context, introduction, module objectives and key concepts, key sections and key cases first in order to understand the background to the topic.

• Read the module notes next, taking care to complete the readings from the ACP and the legislation as cited. Note down brief answers to the exercise questions as you go, but do not dwell on them at great length.

• The ACP readings and legislation are an important part of the course materials as the materials supplied (including the readings) are not sufficient to cover the material for each module.

• Read the articles and extracts provided with the module’s readings after referring to the ACP readings and Corporations Act provisions and note down the important points which emerge from what you have read.

• When referring to cases, check the the additional resource for this subject on case summaries.

• Attempt to answer the problems and questions for the module. Once you have done so, read the model answers in the answer guide when they are made available. Please note these are guides only and do not represent complete answers for the questions. Focus on identifying two or three legal issues and then apply the relevant statutory provisions by satisfying each element of the statutory requirements.

• If there is a master case study instalment to be undertaken for a particular module, read the fact situation and attempt to answer the questions, comparing your efforts with the suggested answers in the answer guide.

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It will be obvious to you that one of the most distinctive features of adults as learners is their ability to draw upon their personal experiences and existing knowledge and bring them to bear on the process of their own learning. You should not hesitate as you read through these materials to draw upon your own experience and knowledge, especially as they relate to corporate practice, to reinforce your learning. For assessment purposes, however, please stick to the corporate law rules (both judge made and relevant statutory content of the Corporations Act 2001 (Cth) and ASIC Act) in support of your answers.

Another important element of any structured educational activity is the provision of regular feedback to the participants. The suggested answers provided in the answer guide have been written in order to provide you with feedback and thereby enable you to assess the quality of your own learning progressively as you work through the materials.

Caution note

Although a subject studied through online delivery confers the twin benefits of enabling you to proceed at your own pace and to study at your convenience at home or in the office, this form of study requires considerable self-discipline — particularly when studying a subject that contains voluminous content (such is the nature of Australian corporate law). It is important to try to set a regular time to read the materials and attempt the various questions that are set in the materials.

There is a risk that, if you allow yourself to fall behind the suggested timetable, you may limit your learning and encounter difficulties in meeting the deadlines for the presentation, assignment and examination. Take steps to avoid that trap. Remember research shows that ‘slow and steady’ is the key to success for any form of study.

INTRODUCTION TO THE MASTER CASE STUDY

These supplementary materials contain one further dimension to the learning strategies which you can draw upon when studying online. We call it a master case study.

In addition to the problems and questions raised in each module, the master case study, which is an evolving corporate fact situation developing over five instalments, should be completed for Modules 3, 5, 7, 8, 9 and 11. Note that some modules overlap areas of law and this is a broad guide.

There are practical limitations to a learning process which treats each topic in isolation. The master case study is designed to give participants the opportunity to work on problems which range over the material in several modules, deal with issues cumulatively and provide more realistic and complex fact situations. The master case study commences at the conclusion of Module 3 with a

consideration of the background facts to a particular corporate problem which evolves further in each succeeding part. Most points act as a revision tool, but some require future reading to help you develop problem solving skills.

The master case study, which weaves itself in and out of the subject materials, also provides an additional opportunity for you to test your knowledge and reinforce the progress of your learning as you work your way through the subject.

Answer guides are provided for each of the instalments to enable you to check the quality of your own answers.

The master case study, dealing with the issues raised by a complicated fact situation, is considered to be excellent preparation for the examination.

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Supplementary material

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CLASSROOM SM

The classroom provides you with a fully interactive learning environment. Here you can chat with other students, pose questions to your lecturer and establish study groups with other students.

Your lecturer is available to answer reasonable questions to assist you with your study of the subject materials.

DISCUSSION QUESTIONS

These are further practice questions taken from previous exams to assist with your work during the course. They may be used by your lecturer as part of the basis for the discussions in the classroom.

Directors’ and officers’ duties Question 1

You are the company secretary of Bing Pom Enterprises Ltd, which is a large public company but not as yet listed on the Australian Securities Exchange. A senior federal politician has just lost his seat at the last election. Your chair, Lady Snow, thinks it would be excellent idea to have him appointed to the board of directors as a non-executive director for a fee of $35,000. The politician is a little shy about being associated with such a powerful company, but is not against the idea, as he can represent the smaller investors’ and employees’ interests, as well as the broader community.

Lady Snow wishes you to prepare on behalf of the company and the board a briefing report for all non-executive directors on their rights and obligations, particularly focusing on issues such as directors’ duties, ethics, corporate governance and reporting requirements.

Prepare the briefing report including, in point form, all the additional information a new director might like to see to assess the company’s position.

Question 2

Diamond Explorations NL is listed on the Australian Securities Exchange and specialises in

discovering the location of potential diamond mines. The company has a chief executive, Mr Carrot, and a chair, Mr Miner, and two executive directors and two non-executive directors. The non- executive directors, Ms Sparkle and Mr Lustre, are regular attendees, with the chair, at board meetings and also, with the chair, sit as an audit and remuneration committee for the company.

The company’s performance in recent years has been quite poor and there have been rumours of Mega Mines Ltd possibly taking them over, especially as Mr Carrot has been seen having lunch with executives of Mega Mines.

Although the company is based in Western Australia, the last board meeting was held in South Australia because the company also happens to own a vineyard there. While Ms Sparkle and Mr Lustre were talking on the flight home, another passenger, Mr Ruby, overheard their discussions about a potential new diamond discovery. Mr Lustre clearly indicated that he knew that there was a geologist report in his briefcase which looked promising, but he had only read the executive summary.

By the next morning the share price in Diamond Explorations NL had risen by 22 per cent and there had been large purchases of shares by Mega Mines Ltd, Mr Ruby and Ms Sparkle.

What legal issues under the Corporations Act 2001 (Cth) arise in this question?

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Question 3

Robert, Christine and Audrey are experts in the field of audio-visual techniques for pop concerts.

They have worked in all the main entertainment complexes in each state capital. They believe they can establish a lucrative business to exploit the latest demands in audio-visual technology for mass concerts, as well as other commercial and domestic applications. However, such an enterprise will require a large capital injection and the financial institutions have not been keen on the idea of lending or investing up to $25 million on such a high risk venture.

Two rich individuals, Carl and Kate, have been willing to subscribe $5 million each, if Robert and Christine can raise the other $15 million. Robert, Christine and Audrey establish a company called Smada Shows Ltd, using nominees for the minimum number of members, and appoint themselves as directors. At their first board meeting they issue 50 million ordinary shares at one dollar each. Five million are issued to both Carl and Kate, and are to be fully paid up. Fifteen million are issued, fully paid up, to the three directors equally, in consideration for their previous goodwill and the company’s exclusive use of their technical skills. The remaining 25 million shares were issued to a trust equally owned by Robert, Christine and Audrey, with only one cent to be paid at the time of allotment and the remainder to be called at the option of the board.

The directors had a second board meeting the following week and ratified a contract made by Robert before the date of incorporation to purchase some laser equipment on behalf of the company. Carl and Kate have only recently discovered that they are the only subscribers who have to pay full value for their shares and that the trust has lodged all its proxy voting rights with the chair Robert. Also the laser is worth only 60 per cent of what Robert paid for it on behalf of the company.

Discuss.

Minority protection Question 4

Bootleg Ltd, an unlisted company incorporated in 1988, has appointed Jean as its new company secretary. The company has the equivalent of the old Table A articles in its constitution and wishes to issue preference shares. The company, through its managing director, Trish, has approached 15 financial institutions and ten wealthy individuals to raise the $10 million that is necessary for a new DVD project.

Angus, who is an employee shareholder in Bootleg Ltd, overheard Jean and Trish talking about this new issue of shares. He is upset that all the employees should be given the opportunity to invest in the company and that his existing shareholding and voting power will be diminished.

The board of directors has also been considering issuing new ordinary shares (to be called ‘Class B’

shares) which have ten votes per share rather than the existing one vote per share. These new Class B shares will only be issued to the directors of the company and a minimum of 1,000 must be

purchased. At the same board meeting that discussed the proposed issue of new shares, the board was advised that it could cancel all its registers.

What legal rights does Angus have under the Corporations Act 2001 (Cth) in the above fact scenario?

Question 5

Biggles Pty Ltd wishes to amend its corporate constitution in two ways. The board of directors (Phil, Amanda and Brian) has convened a special general meeting of the shareholders to pass

amendments relating to the corporate constitution. The directors are all required to have qualification shares equalling ten per cent of the issued share capital.

The EastPack (Venture Capital Fund) Bank Ltd owns 20 per cent and the remaining 50 per cent is divided between the company’s 70 employees under an existing employee share scheme. In the company’s last annual return it stated that it had a turnover of $15 million and $2 million net (after tax) profit.

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The constitution is to be amended to enable the company to expropriate the shares of members if they directly compete with the company’s core business or if, in the opinion of the directors, they unreasonably hinder the growth of the company. The share value is to be calculated by a formula which is 25 per cent above the current deemed market share price. The constitution is also to be altered to restrict the company’s objectives so as to prevent it from dealing with any French company (as a protest against past nuclear testing).

Has Biggles Pty Ltd contravened the Corporations Act 2001 (Cth)?

Question 6

The corporate constitution of Adwind Ltd is an amended form of the Replaceable Rules in the Corporations Act. The unlisted company has appointed a new managing director, Adrian, who has upset many of the traditional shareholders, such as Brian. Adrian owns 20 per cent of the company, two financial institutions own 78 per cent and 120 other members own the remainder. Brian owns 0.02 per cent of the shares and only ordinary shares have been issued by Adwind Ltd. Adrian has great plans for the company and Brian totally objects to the new direction of the company.

The board of directors decides to amend the corporate constitution by inserting a clause which will enable the company to compulsorily purchase any members’ shares. The company believes it can save a great deal of administration cost if it only had five members. The company also wishes to amend its old memorandum of association to increase its nominal share capital with the intention of issuing new shares next year.

Advise Brian of his legal rights in this situation.

Fundraising Question 7

The board of MegaGrowth Ltd announces that next month it will issue for the first time 25 million

$1.00 redeemable preference shares, which are to be redeemed by an equal issue of ordinary shares on 1 January 2018. The prospectus has been lodged with the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) has been notified.

An existing ordinary shareholder, Wong, is concerned that there will be a serious dilution of voting rights and that the profitability forecasts are extremely optimistic. Wong has been very outspoken at the company’s general meetings and is often denied access to the company’s registered office.

Wong has contacted ASIC and ASX in respect of these matters and claims that the directors have refused to respond in any shape or form to his telephone calls and faxes.

MegaGrowth Ltd is now considering withdrawing the prospectus and making 50 private placements in lots of a half million shares to existing members at a value of $500,000.

Advise MegaGrowth Ltd and Wong.

Question 8

Add-Dams Pty Ltd is a specialist irrigation consulting company with 42 members. Martin, the company secretary has had two requests to amend the company register in the last week. Lucy has just purchased all the shares from her brother Robert and seeks the board’s approval for the transfer and a new share certificate to be issued. Jessica has inherited 100 shares from her great-aunt Christine and wishes the register of members to be altered.

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The board of Add-Dams Pty Ltd has been considering converting the company into a public company and raising capital by issuing shares to a few financial institutions and possibly the public in the future. However, the board is aware that both Lucy and Jessica are totally opposed to the conversion. The majority of members have been in favour of the conversion and have received a letter outlining all the benefits of the public status. The letter does not mention the negative aspects such as the loss of control and costs associated with being a public company.

Discuss the legal issues arising under the Corporations Act 2001 (Cth).

Annual reports and financial disclosure Question 9

Dodgy Motors Pty Ltd has been in business for three years and has rapidly grown its ‘pre-loved’ car yards. The company is owned by a husband and wife team called Bill and Julie Shah who each own a $1 share. It is estimated that the company has a turnover of about $10 million and until January 2018, both Bill and Julie were the only directors.

The company secretary, John Franks, advised the board that after the First Corporate Law

Simplification Act 1995 was passed, they only really needed one director. Julie volunteered to give up being a director, but would become head of human resources as the company sales team was now approaching 55 people.

Dodgy Motors Pty Ltd has been so successful in Sydney and Melbourne that the concept of ‘pre- loved’ cars is to be franchised. In December 2017 Dodgy Motors incorporated three subsidiary companies, each with a million dollars of capital, to set up operations in Brisbane, Adelaide and Perth. John Franks has been appointed the company secretary to all of these proprietary companies and Julie Shah was named as the sole director. However, John Franks has notified Bill and Julie that he wishes to reside in Sydney and appoint assistant company secretaries for each company.

Discuss the legal issues that arise from these facts.

Question 10

Town Builders Ltd is a non-listed company which raised capital (by a prospectus) last year to help develop a new site in Queensland and Western Australia. The prospectus and last year’s annual report noted that the funds would be equally divided between the two major projects. The shares that have been issued are enhanced disclosure securities and have voting rights attached (equities).

However, when the half-yearly accounts were lodged with the Australian Securities and Investments Commission (ASIC), it could be noted that 90 per cent of the funds were being applied to the Queensland project and only ten per cent to Western Australia. The WA project has also fallen behind schedule and it could substantially reduce the company’s profitability.

A member of Town Builders Ltd, Cliff, contacted the company secretary, Sean, requesting an explanation for why the board had made this decision. Sean replied that it was not up to the board to disclose such commercial reasoning. However, Cliff had been involved in a casual conversation with a non-executive director (Jessica) on a flight from Perth to Brisbane and discovered that a further large government contract was likely to be granted in Queensland.

Discuss the legal issues.

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Australian Securities and Investments Commission Question 11

Nightmare on Pitt Street Ltd is a company that is involved in a variety of business activities in the video tape industry. The company is not listed on the Australian Securities Exchange and has relied on the Replaceable Rules. The company secretary, Sean, is expected to report to the managing director, Ian, every day and to the company chair, Jessica, weekly. However, the reality is that Sean does keep the managing director informed as necessary, but the chair is only contacted a week before each monthly board meeting. Jessica has been a non-executive director for two years and chair for the last three months.

The company secretary has received a number of letters from the Australian Securities and Investments Commission (ASIC), stating that it believes that Nightmare on Pitt Street Ltd has not filed any annual returns since 2015, that the company has not notified ASIC of a change of director in 2016 and that the company has failed to maintain proper registers and books. Sean was only

appointed company secretary in January 2014 and, although a qualified accountant, he has never been a secretary before.

Sean has not informed anyone of ASIC letters and Laurie, an ASIC officer, has telephoned to come and visit Ian, Jessica and Sean.

Discuss the role and powers of ASIC in the above situation.

Question 12

Nuts and Bolts Ltd is a large manufacturing company that was incorporated in 1905. The company has suffered financial difficulties during the last few years and has had to borrow heavily to continue in business. A creditor, Raw Materials Pty Ltd, has recently not been paid for the supply of raw materials, but is aware that the company has many unencumbered assets. The creditor has accessed the ASIC database to find details of the company’s charges, its annual returns and the personal information of the managing director (Evan) and the company secretary (Vanessa).

The ASIC information appears to be inaccurate for the period 1990 and 2000. Some of the information recorded by the State Corporate Affairs Commission was not properly transferred to ASIC registers and database. Nuts and Bolts Ltd does not appear to have filed an annual report for the last two years.

Raw Materials Pty Ltd does not believe that Nuts and Bolts Ltd is insolvent, but wishes to get ASIC to instigate an investigation in the public interest. Both Evan and Vanessa will not answer any

telephone calls or faxes by Raw Materials Pty Ltd or ASIC.

Discuss.

Membership rights and revision questions Question 13

Rainbow Pty Ltd has two directors, Yolandi and Zack and an independent company secretary, Simon. Simon has been requested by the board to purchase a new computer system for the

company’s main business operation. Simon has investigated a number of computer retailers and has recommended HiTech Ltd. Simon has not mentioned that his sister, Bertha, has a substantial

shareholding in HiTech Ltd. Simon honestly believes that he has obtained the best contract for Rainbow Pty Ltd.

Zack has just discovered who owns HiTech Ltd and wishes Rainbow Pty Ltd to be released from the contract. Yolandi has also recently told a newspaper about the company’s potential for marketing a new waste management system. The information includes some crucial trade information which many of Rainbow’s competitors would like to access.

Advise Rainbow Pty Ltd and Zack.

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Question 14

William owns five per cent of the ordinary shares in Widgets Pty Ltd and has been extremely disappointed with the performance of the company and its managing director/chair, Vince. William wishes to get the 20 members of the company together to discuss the company’s future and try to remove Vince as a director. Vince owns 20 per cent of the shares by way of his family company (Boys Own Pty Ltd) and often receives 60 per cent of the proxies for an annual general meeting.

William requests Vince to convene a general meeting, but this is refused by the board. William decides to wait until the annual general meeting on 1 May 2017. However, William never receives a notice of the meeting and when he turns up at the company’s registered office (where all previous meetings have been held) he discovers the AGM is taking place at The City Hotel.

Advise William and Widgets Pty Ltd.

Question 15

WA Ltd has a board of seven directors chaired by Laurie. The chief executive director is Alan. The company is not listed on the ASX and specialises in developing old mining sites into leisure facilities.

Laurie owns the majority of shares in a consulting company, Consult Facilities Pty Ltd. This company has recently undertaken a feasibility study for a new site in Old Mine Town. The evaluation is very positive and contains a strong recommendation to WA Ltd to purchase and develop the site. Alan and Laurie have access to this report first and after initial board discussions recommend against this project.

Two years later, a minority shareholder in WA Ltd, Sucker Pty Ltd, has discovered that the old mining site has been developed by another company owned by Alan and Laurie. This company has now made a multi-million dollar profit out of the project.

Advise WA Ltd.

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