BSL305 Assign 2 PDF

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Assignment 2...

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QUESTION ONE

(a) Yes, Growth Ltd can raise funds without Prospectus. Growth Ltd can issue an Offer Information Statement to raise $10 million funds and raise the remaining $2million through Small- Scale Offering which doesn’t require disclosure.

(b) The directors will be safe from prosecution under S731 Due Diligence Defence for Prospectus. S731 states that they need to have reasonable inquiries and reasonable belief in their statements and omissions. In which a person does not commit an offence against subsection 728(3), and is not liable under section 729 for a contravention of subsection 728(1), because of a misleading or deceptive statement or no omission in a prospectus if the person proves that they made all inquiries (if any) that were reasonable in the circumstances and after doing so, believed on reasonable grounds that the statement was not misleading or deceptive and there was no omission from the prospectus in relation to that matter.

(c) Once a person making an offer becomes aware of a false and misleading statement in the disclosure document that needs to be included, that person may lodge either a replacement or supplementary document with ASIC to rectify the deficiency in the previous lodge disclosure document. This is as per S719 of CA, the company should quickly lodge a supplementary document with ASIC to include information that should have been included in the prospectus.

(d) The Director will be protected when there’s a misleading statement as per S733(1) in the CA. The director can only apply for defences under S733(1) if he can prove that he

reasonably relied on information given by someone else; which is someone other than the director, employee or agent.

QUESTION TWO

(a) In S256A, it states that the rules to be followed by a company for reduction in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by: (1) addressing the risk of these transactions leading to the company’s insolvency (2) seeking to ensure fairness between the company’s shareholders (3) requiring the company to disclose all material information.

(b) 1. Goodtimes Ltd can buy-back 12% of the ordinary shares through selective buy-back since only selected members are given the offer to buy-back shares and not all members. In order to trigger selective buy-back, shareholders must approve the buyback either by special resolution or unanimously which is as per S257D. Then the selling shareholders or their associates can’t vote in the special resolution. According to S257D(2), when the company is sending the notice of the meeting it must also include a statement that contains all information that is material to the decision on how to vote on the resolution and this notice along with any other documents that is going to be sent out must be lodged with ASIC before it is been sent out as per S257D(3).

In addition, the company must disclose relevant information together with the offer terms that are material to the decision on whether to accept the offer or not as per S257G. The document that sets out the terms of the buy-back offer or notice to the meeting and other documents sent together with the notice must be lodged with ASIC before entering into a buy-back agreement as per S257E. This document must be lodged at least 14 days before entering into buy- back agreement as per S257F, once the shares have been transferred back immediately cancel the shares S257H and notify ASIC of the cancellation with reference to S254Y.

2. Goodtimes Ltd is able to offer all shareholders the opportunity to sell 8% of the shares through an equal access buy-back scheme. The conditions are as per S257B(2), it is offered to all ordinary shareholders to buy back the same percentage of shares from each and every shareholders, offer terms are the same, all ordinary shareholders have the reasonable opportunity to accept offers made to them and the agreement are not entered into until a specified time for acceptance has closed.

In addition, 8% is within the 10/12 limit which is with reference to S257B(4). As per 257G, the company must disclose relevant information together with the offer terms that are material to the decision on whether to accept the offer or not. Then, the document that set out the terms of the buy-back offer must be lodged with ASIC before entering into a buy-back agreement as per S257E. This document must be lodged at least 14 days before entering into a buy-back agreement as per S257F. Immediately after the registration of the transfer to the company of the shares bought

back, the shares are cancelled according to S257H. Lastly, ASIC must be notified of the cancellation under S254Y.

QUESTION THREE

(a) As per S181(1)(a), a directors have fiduciary and statutory duty to act in the best interests of the company. Nominee directors are permitted to act in the interest of their appointor provided that they honestly and reasonably believe that there is no conflict between interests of their appointor and the interests of the company. When the interests of the appointer and the company conflict, the nominee director must act in the best interests of the company. In Levin v Clark case, the nominee directors breach their duty where there is a clear conflict between the interests of the company and their appointor and the company's interest are sacrificed. The court held that the extent of the fiduciary duties of directors depends on the circumstances and these may include the fact that the constitution provided for the appointment of nominee directors.

In addition, when the company is still solvent, the company’s best interest refers to shareholders. However, when the company’s solvency decreases, the directors must act in the best interest of the creditors more than the shareholders which is as per Kinsella case.

(b) In this case, the shareholders cannot interfere in management power or decisions as the management power or decisions is not within the capacity of members. It is unconstitutional and amounts to contravention of S140. It states that in S140, internal rules are binding contracts between company, directors, secretary and members in their respective capacities. In addition, directors have the power to exercise any of the company’s powers as per RRs198A which is a binding contractual right as per S140. Hence the directors is the major decision-making organ of a company and the members can only exercise a number of specific rights.

QUESTION FOUR

Part a)

The procedure for the company and Christine must follow under the CA in order to employ Sunil for the advertising campaign.

Conflict of interest may arise when the directors’ interest differs from the company’s interest. As per Aberdeen Railway case, conflict of interest not only refers to current interest but also for potential interest. There are some cases where personal profits arising from acting as a director with reference to Regal Hastings case and taking up corporate opportunity with reference from Cook v Decks Case. According to 228(2)(d), the spouse is regarded as one of the related parties in a public company. Supplying services to or receiving services from the related party is considered giving financial benefit as per S229(3)(d). For related party transactions to occur, there are 3 important elements. They are that the company must be a public company, must be a financial benefit and the financial benefit must be given by a

public company to a related party. If the above elements are met, as per S207, members of the company must give approval under S217-227. The procedure to obtain the members’ approval firstly is Resolution may specify matters by class or kind (S217). The company must then lodge material that will be put to members with ASIC at least 14 days before the notice convening the relevant meeting is given (S218). There will then be requirements for an explanatory statement to members (S219). The last procedure will be the Declaration by court of substantial compliance (S227).

As per S208 of CA, for a public company to give a financial benefit to a related party of the public company which requires members’ approval. In this case, Related party refers Christine’s husband, Sunil which is as per S228. Hence, in order to employ Sunil to appear in television commercials for a marketing campaign, member’s approval is needed since Layabout Ltd is a public company which is giving a financial benefit to director Christine’s husband thus amounting to a related party transaction.

However, members’ approval is not required for appointment of Harry’s son if it is a transaction done at arm’s length terms (S210) and for the remuneration given is reasonable (S211). For this scenario, directors’ approval is sufficient.

For this scenario, members must give approval under S217-227 so that Christine and the company is able to employ her husband.

Part b)

Directors’ duties of care and diligence are imposed by S180(1). A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise are expressed in S181(1). S181, directors and other officers are under a duty to act in good faith in the best interests of the corporation and for a proper purpose. Breach of this duty to exercise powers for a proper purpose attracts the civil penalty provisions and possibly criminal liability where dishonesty is involved. In general, the directors’ primary duty is to shareholders, in addition to the requirement to ensure compliance with general and particular laws related to the company's operations. However, if the company is insolvent, or there is a real risk of insolvency, the directors’ duties expand to include creditors and also the employees with outstanding entitlements. The common law and S180(1) both imposed an objective reasonable person standard. Even though the standard of care is variable, cases such as Daniels v Anderson make it clear that the law imposes minimum standards of care and diligence on directors. With reference to ASIC v Vines, the fundamental principles of tort law relate to determining the carefulness of a reasonable director or officer when making decisions that involve a risk of harm. According to those principles, the standard of care that a reasonable individual should practice when making risky business decisions is determined by weighing the following factors; the magnitude of risk of harm and the probability of it occurring, the seriousness of the loss that would result if the harm occurs and the expense, difficulty and inconvenience of taking alleviation action.

There are various penalties and consequences of insolvent trading, including civil penalties, compensation and criminal charges. The Corporations Act provides for certain statutory

defences for directors. However, directors may find it difficult to rely on them unless they have taken steps to keep themselves informed of the financial position of the company.

Compensation proceedings for amounts lost by creditors may be initiated by ASIC, the liquidator or the creditor against the director himself. In addition to civil penalties, an order for compensation may be issued. Compensation payments are potentially unlimited and could lead to the personal bankruptcy of directors. A director's personal bankruptcy disqualifies that director from acting as director or managing a company.

S180(2) sets out a defence called the business judgement rule for directors’ and officers who make business judgement that would otherwise contravene their statutory, common law or equitable duties of care and diligence. The section provides that a director or other officer making a business judgment shall comply with the provisions of S180(1) and its related duties in common law and in equity where they make the judgement in good faith for a proper purpose S180(2)(a), do not have material personal interest in the subject matter of the judgement S180(2)(b), inform themselves about the subject matter of the judgement to the extent they reasonably believe to be appropriate S180(2)(c), rationally believe that the judgement is in the best interest of the corporations,

Reference: Lipton, Herzberg and Welsh. 2014. Understanding Company Law 19th Edition – Thomson Law Book Co...