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Corporate Law 2020Week IRegulatory framework Registration and its effectA company is a separate legal entity. It can be sued, sign a contract, own property, like a person. In the eyes of the law it is classified as an artificial personIn the beginning, the company law was regulated by each state, an...

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Corporate Law 2020 Week I Regulatory framework Registration and its effect A company is a separate legal entity. It can be sued, sign a contract, own property, like a person. In the eyes of the law it is classified as an artificial person In the beginning, the company law was regulated by each state, and then they began to harmonise the company law across the nation; this was not successful, then the Commonwealth tried to control it, it was challenged, the high court agreed with the High Court and NSW, then the states referred the power to the Cth, and then finally we have the Cth Corporations act 2001. What is a company? An artificial entity recognised by the law as a legal person with rights and liabilities. - Distinct from its shareholders, directors, officers and employees - Perpetual succession - Limited liability - Issuing of shares and transferability of shares Shareholders – regarded as “the owners” of the company - Or not? What do shareholders actually “own”? Directors/board of director – usually given the power to control the management of the company’s business What -

are companies used for? Usually used as a vehicle to run a business Provides tax advantages Advantage of limited liability to shareholders

What -

type of companies? Nearly 2.7m registered The majority operate small businesses There are significantly more proprietary companies than public companies More than 2000 companies are listed on ASX Company groups – common for large-scale businesses

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The road to company law harmony in Australia • Today, companies are regulated by Commonwealth legislation, the Corporations Act 2001 (Cth) • Originally, company law was regulated by each State (and the Commonwealth on behalf of the Territories)

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• • • • • • •

This fragmented ‘federal’ system resulted in 7 separate sets of legislation that regulated company law in Australia Throughout the 20C, attempts were made to cooperate between the States and Commonwealth to achieve a uniform companies law These attempts were not very successful, so in 1989 the Commonwealth tried to take control and legislate for all States (so there would be just one piece of legislation) Problem: s.51(xx) of the Australian Constitution HC in NSW v Cth (1990) said the Commonwealth did not have the power under s.51(xx) of the Constitution to legislate in relation to the ‘incorporation’ of companies After this, the States all agreed to refer their powers in respect of companies to the Commonwealth Commonwealth then passed the Corporations Act 2001 (Cth)

Regulators - Takeover Panel - Australian Securities Exchange - Australian Securities and Investments Commission The Australian Securities and Investments Commission • Primary Corporate Regulator - Ensures Corporations Act is complied with • ASIC Act 2001 (Cth) - Commonwealth Agency (b/c referral of State power) • Role and functions - Registers new companies - Regulation of financial services and markets - Powers of investigation to ensure compliance with of the Corporations Act 2001 (Cth) – ASIC Act 2001 - Power to bring legal proceedings Powers include: • Investigate breaches of the Corporations Act • Instigate civil proceedings and criminal prosecutions (concurrent with DPP) • Advises ministers on necessary changes to the Corporations Act • Educational role Concepts: - Registration - Perpetual succession - Limited liability - Separate legal entity (separate from shareholders, directors, employees, creditors, etc.) - Corporate veil

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Effects of Registration • Company comes into existence on registration (s119) • Powers of a company as a body corporate are listed in s124(1) and includes legal capacity to: 1. Own property 2. Contract 3. Sue and be sued 4. Issue shares 5. Grant a security interest 6. Do anything it is lawfully authorised to do Perpetual succession The corporation continues to exist despite the death, bankruptcy, insanity, change in membership or an exit of any shareholder or member, or any transfer of shares Limited Liability • Liability of shareholders is limited to the amount unpaid on their shares • Limited risk and sharing of risks was (and still is) necessary to mobilise much needed capital for large projects and entrepreneurial development of economies Separate Legal Entity What is that special about companies having a Separate Legal Entity? • Company’s obligations and liabilities are its own, and not those of its shareholders or directors or managers and employees • Company can sue and be sued in its own name • Company has perpetual succession • Company’s property is not the property of its participants • Company can contract with its participants • A company may concurrently have a variety of legal relationships with others (e.g. directors, shareholders and employees) Example: A and B each own 50% of the shares in AB Co Pty Ltd. There are no other shareholders. AB Co owns property worth $1 million. What is A’s interest in the property? Salomon v Salomon & Co Ltd (1897) AC 22 Facts • Mr Salomon was the sole trader of a shoe and leather business • Co Act 1862 (UK) required 7 shareholders • Salomon & Co Ltd incorporated • Mr Salomon sold business to Co for shares and secured debt

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• Business failed, assets of Co insufficient to repay secured creditor (Mr Salomon) and unsecured creditors Arguments Liquidator argued that because the business operated by the Company as the same as that operated by Mr Salomon, and because Mr Salomon had effective control of the Company, the court should hold Mr Salomon liable for the loss suffered by the Company House of Lords • A Company is a separate legal entity even though a single person manages and controls it • A company can contract with its controlling participants “The company is at law a different person altogether from the subscribers to the memorandum [shareholders]; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided in the Act.” (Lord Macnaghten at 51) Lee v Lee’s Air Farming Ltd (1961) AC 12 Facts • Company operated a crop dusting business • Mr Lee was the main shareholder and managing director of the company • Mr Lee was also an employee pilot • While working, Mr Lee was killed in a plane crash • Mrs Lee claimed that she was entitled to workers compensation because Mr Lee was an employee • Insurer argued Mr Lee could not be an employee and employer Privy Council • A company is a separate entity from its controller – who may also its sole employee • A company is a separate legal entity and a person may concurrently have a variety of legal relationships with that company Macaura v Northern Assurance Co Ltd (1925) AC 619 Facts: • Macaura assigned right to timber to a Company, received shares in consideration • Timber destroyed in fire

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• Macaura claimed insurance – policy was in his individual name, not in name of the Company House of Lords: • Shareholders do not have a proprietary interest in a company’s property • Insurance legislation required policy holder to have an ‘insurable interest’ in the property • The company was the owner of the timber, not Macuara (meaning he did not have an ‘insurable interest’ and so could not claim on the insurance for the damaged timber) Lord Buckmaster: “no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up”. The importance of not forgetting the distinction between the interest of “the separate legal entity” and the “shareholders and creditors” However, treat this case with caution because of section 17 of the Insurance Contracts Act 1984 (Cth)! Salomon’s Principle and Corporate Groups Corporate groups: Companies remain separate legal entities Walker v Wimborne • Mason J rejected the argument that where companies were associated in a group, directors could disregard their duties to individual companies in the group provided their actions were undertaken for the benefit of the group as a whole Industrial Equity Ltd v Blackburn • Regarded each company within the group as a separate legal entity. A subsidiary's profits could not be regarded as the profits of its holding company available for payment of the holding company's dividend. Pioneer Concrete Services v Yelnah • Marketing agreement was an undertaking given by the subsidiary and not the holding company: The two (subsidiary and holding company) were separate legal entities. It was impossible to infer an agency relationship between the holding and subsidiary companies in the circumstances. Piercing the corporate veil

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Corporate veil • Legal rules that grant the company ‘separate legal personality’ and separate the compant from its participants (e.g. shareholders, directors) are referred to as the veil of incorporation or corporate veil • Salomon’s case established that a company and it’s participants must be treated separately – i.e. the corporate veil protects the company’s participants from liability “… once the company is legally incorporated it must be treated like any independent person with its rights and liabilities appropriated to itself …” This is the general rule Lifting the Corporate Veil means: Disregarding the concept of the company as a separate entity and imposing liability Only in exceptional circumstances will a court pierce the corporate veil and disregard the separate legal personality of a company Common law exceptions • Where company used to avoid existing legal duty • Where company used to perpetrate a fraud (= Instances where “the corporate form was used for something the law never intended it to be used for”) Statutory exceptions • Directors’ liability for insolvent trading – s 588G • Uncommercial transactions – for purposes of insolvency • Security granted to officers • Financial assistance provided to officers • Taxation legislation – holding directors personally liable Insolvency = company cannot pay its debts as they fall due for payment Corporations Act lifts the corporate veil when a company trades while insolvent and imposes personal liability on directors for the company’s debts (s.588G)

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Directors become personally liable if they fail to prevent the company incurring a debt when there are reasonable grounds to suspect the company is insolvent or the debt will render the company insolvent Defences – s. 588H Lifting the corporate veil of group companies

“…the court is not free to disregard the principle of Salomon v Salomon merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entitled with all the rights and liabilities that would normally attach to separate legal entities: Adams v Cape Industries plc

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Can only be justified if “the corporate form is used for something the law never intended it to be used for”! However, it is not at all easy to determine what these instances are. Lipton, Herzberg and Welsh [2.175]-[2.265] Treat with caution! Most of the areas discussed are either statutory examples of lifting the corporate veil or unique company law principles to hold individual / corporations liable and not necessarily instances of “lifting or piercing the corporate veil”! See Prest v Petrodel Resources Limited [2013] UKSC 34 Ford, Austin and Ramsay, Principles of Corporations Law mentions only 3 instances where a court can depart from the separate entity doctrine: 1. Where a company structure is used to perpetuate a fraud 2. Where a company structure is used with the sole, or dominant, purpose of enabling another person to avoid an existing legal obligation 3. Under-resourced companies may be found to be agents of their controllers or to be shams or devices All three instances seem pretty close to instances where “the corporate form was used for something the law never intended it to be used for”! Types of business structures: The company compared with other forms of business organisations Q: Why are we talking about this? A: The company structure is the most popular structure for operating a business, but it is not the only option. We need to know what the alternatives are and when to use them Types of business structures - Company ‘separate legal entity’ - Sole trader - Partnership - Joint venture - Trust Factors to consider: - Purpose - Size - Costs - Flexibility - Liability - Risk and liability - Tax

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Company Pros - Separate legal entity - Limited liability - Perpetual succession - Flexibility o Share classes o Liquidty - Finance Cons -

Corporations Act compliance Establishment and ongoing costs Shareholder less involved in management Public disclosure requirements

Sole Proprietor/Trader Pros - Simple - Minimal establishment costs - Minimal regulatory compliance issues - High level of control Cons - No limited liability - Small size makes raising finance difficult - Limited lifespan Partnership Pros - Minimal establishment costs: only need meet definition of partnership - Minimal regulatory compliance issues - Active in the conduct of the business Cons - No separate legal entity: partners contract personally for the partnership - Risk: partners incur debts/obligations on behalf of other partners i.e. joint and several liability - Size limited to 20 partners (subject to exceptions) Joint venture Contractual relationships similar to partnership but relationship is not a business in common

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Party A

Party B

Joint Venture

Pros - Severally liable: i.e. obligations and liabilities can be individualised (unlike partnership) - Inexpensive to create and maintain Cons - No limited liability - No perpetual succession Trust A relationship, not a legal entity Many types Trustee of the Trust

Beneficiary

Beneficiary

Beneficiary

Pros - Beneficiaries have an equitable interest in trust property; contra shareholders who have no legal/equitable interest in company property - Income splitting – but may be contrary to anti-tax avoidance Cons - Maximum life span of 80 years (law against perpetuities) - Beneficiaries have limited powers (unlike shareholders) - No separate legal entity; trust cannot hold property, contract, sue or be sued - Trustee personally liable Company Registration Company Name • Choice of company name • Check availability – s 147(1) • Reserve the name (optional) • Display of company name • ACN or ABN Application for Registration • ASIC Form 201

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• • • • • • • •

Select type of company Select name Obtain consents Select registered office Replaceable rules or company constitutions Lodge application and pay fees Certificate of registration issued ASIC Corporate Key

Post-registration Requirements • Appointment of director and secretary • Common seal (optional) • Registers • Appointment of auditors • Financial records, and books

Week II Types of Companies Constitution and replaceable rules Company limited by shares S 9 definition Means: A company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares respectively held by them. • Most popular • Member’s liability to the company is limited to amount unpaid on their shares (s.516) – so if shares are fully paid, there is no liability risk • Warning to creditors - Company name “Proprietary Limited” “Pty Ltd” or “Limited” “Ltd” (s.148(2)) • Can be public or proprietary Company limited by guarantee A company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up • Member’s liability is limited to amount member undertaken to contribute if company wound up (s.517) - Members agree that they will be liable for a certain amount • No share capital • Often used for non profit activities • Can only be a public company

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• About 11,000 in Australia Unlimited Company S9 definition Unlimited company means • A company whose members have no limit placed on their liability - i.e. Members are jointly and severally liable for company’s debts without limitation upon winding up • Not suitable for trading ventures; primarily used by professional associations where members required to have unlimited liability • Can be public or proprietary • Only about 600 in Australia No liability company • Must be a mining company (s.112(2)) - Mining Company = constitution must state that its sole objects are mining purposes (s.112(2)(b)) • Can only be a public company • Warning to creditors - “No Liability” or “NL” must be used in company’ name (s.148(4)) • Only about 1,000 in Australia Public & Proprietary Companies S9 definition: A public company means a company other than a proprietary company Australian companies are either public or proprietary Proprietary • Must have no more than 50 non-employee shareholders (s.113(1)) • Must not engage in any activity that would require the lodging of a disclosure document (s.113(3)) (limited exceptions) • Must have “Proprietary Limited” or “Pty Ltd” at end of name (s.148(2)) Small and Medium Business Family run or Tightly Held Around 99% Public • Company other than a proprietary company (s.9) • All ASX listed companies are public • Can invite public to subscribe for shares • No restriction on maximum size of membership Large Business Investors Around

Many 1%

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Proprietary Company Small: Small Proprietary Company s.54A(2) • Fewer disclosure obligations • Do not require an auditor Large: Large Proprietary Company s.45A(3) • More extensive disclosure and reporting obligations • S.292(c): “A financial report and a directors’ report must be prepare for each financial year by… all large proprietary companies” • Do require an auditor A large or small proprietary company? S.45A

Am I large

a small or proprietary company?

ABC -

Pty Ltd Profit:

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$100m Net assets: $20m Employees: 40

Def Pty Ltd - Revenue: $100m - Assets: $10m - Employees: 40 Small and Large proprietary companies

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Conversion from proprietary to public proprietary Company can go from proprietary to public, or vice versa by: - Special resolution - ASIC Application (ss162 & 163) Other Classifications – ASX listed companies Listing requirements • Minimum shareholder requirements • Company size Additional Corp Act requirements • Remuneration report (s.300A) • Half-year and annual financial reports Listing Rules • Continuous disclosure - Information that reasonable person expects would have effect on price or value of shares • Corporate governance • Greater shareholder protection ASX Listing Requirements To gain listing, a public company must satisfy a minimum shareholder requirement and a company size requirement Minimum shareholder requirements that a company must meet: 1. minimum 400 shareholders each holding a parcel of shares of at least $2,000 or 2. minimum 350 shareholders each holding a parcel of shares of at least $2,000, 25% of whom are unrelated parties of the company; or 3. minimum 300 shareholders each holding a parcel of shares of at least $2,000, 50% of whom are unrelated parties of the company

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To gain listing, a public company must satisfy a minimum shareholder requirement and a company size requirement The company size requirement may be satisfied by either: - a profits test: aggregated profit from continuing o...