Tutorial answer 2 - useful for exam PDF

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Tutorial answer 2 Question Brick Pty. Ltd. has the following provisions contained in its Constitution: 1. Where a new issue of shares is made, they shall first be offered to existing members in proportion to the shares they presently hold. In the event of any member not accepting some or all of the shares to which he is entitled, those shares shall be offered to the remaining members in proportion to the shares they presently hold. 2. The sales manager of the company shall be A. Harris for a period of ten years at a salary of $75,000 to be increased by 10% per annum in each successive year for the term of his employment. 3. The directors may compel the transfer at valuation of the shares held by any member who is engaged or interested in a business in competition with the company. In such a case the shares will be transferred to such existing member or members as the directors nominate and at a price determined by the directors. Discuss the following situations: a) The directors plan to issue shares to an associate of theirs who is not presently a member of the company. You are an existing member of the company, and claim that the shares must first be offered to existing members in accordance with article 1. Can you enforce this claim? Under s.140 (1)(a) of the Corporation Act which states that a company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract between the company and each member. Because the director issued to outsider who is against the constitution of the company, the company has breached the contract and affected my rights as a member. Therefore as a member i can enforce the constitution to claim those shares. b) Harris is dismissed from his position after two years. Can he sue the company for breach of contract? Would it make any difference if Harris was a member of the company? What should Harris have done to ensure that his employment as sales manager was enforced? Harris may not be able to sue the company because under s.140 of the Corporation Act , the constitution of the company does not have effect between the company and its employee. Even if Harris was a member of a company, he could not enforce the contract as the statutory right was enforceable only in relation to rights that are personal to members in their capacity as such and not in relation to rights they have in other capacities according to the case Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 88. Therefore, the breach by the company does not affect Harris’s rights as a member. However, Harris can argue under equity for his rights to be honoured.

c) Brown holds 30% of the issued shares in a company that carries on the same business as Brick Pty. Ltd. On discovering this, the directors exercise their power conferred by the above clause 3. Does Brown need to transfer his shares? What is the process? Can Brown argue that clause 3 is unfair or not for a proper purpose? Yes, Brown does have to transfer his shares according to the constitution. The directors will determine the price of shares and buy back those shares from Brown, then transfer it to other shareholders. Brown can argue clause 3 is unfair for him; the share should be valued by someone independent from the company, not the directors. Question 1: Ryan is a production designer of a sweet factory, Lollipop Pty Ltd (“Lollipop”). His job is to design the artwork and shapes of the candies that Lollipop produces. The constitution of Lollipop states that after 5 years of working for Lollipop, the company production designer will receive a bonus of 30% of their annual salary. Ryan has now been with Lollipop for 5 years and is entitled to receive the bonus. However, Lollipop refuses to pay the 30% bonus because it has not been making a profit for the last few years and it blames Ryan for his poor designs and artwork. Ryan is not happy and wants to claim his bonus as set out in the constitution. REQUIRED: a) Can Ryan enforce his claim relying on Lollipop’s constitution? b) Would your answer to (a) be different if Ryan was a member of Lollipop? Issue: An agreement in Lollipop’s constitution to pay Ryan a bonus of 30% of his salary has been breached because the company did not want to pay. The key issue is whether Ryan can enforce his claim relying on the constitution of Lollipop Ltd If he was a member of the company, the key issue will be whether the breach affects his right as a member. Rules and Application: Under s.140 (1) of the Corporation Act, the constitution of the company has effects between: A) The company and its member B) The company and its directors and its company secretary C) Member and members Ryan does not fit into any of these categories; he is only an employee for the company and is not a party bound by the constitution.

If Ryan was a member of the company, s.140 (a) can apply to him. However, the rights of a member are as follows: 1) Right to vote 2) Right to attend meetings 3) Right to receive dividends 4) Right to a copy of financial statements 5) Right to apply for a member remedy for oppressive behaviour. The non-payment of Lollipop does not affect any of his rights as a member addressed above, so Ryan could not make any differences because the statutory right was enforceable only in relation to rights that are personal to members in their capacity as such and not in relation to rights they have in other capacities as held in the case Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 88 and In this case, the act of not paying bonus to Ryan does not affect his right as a member of the company. However, Ryan can argue under equity for his rights to be honoured. Conclusion It is likely that Ryan cannot enforce his claim by relying on the constitution.

Question 2: Abe, Baker, and Charlie are members of Super Cup Ltd (“Super Cup”), a successful midsized Australian coffee retailer. Abe is a Super Cup director who also sits on the Gloria Jean’s Coffee board of directors. Super Cup has been so successful in the past seven years that it has come to the attention of global coffee giant Starbucks. Starbucks was so impressed with Super Cup’s performance that it recently acquired 85% of Super Cup’s shares in a takeover action. Starbucks would now like to acquire the remaining 15% of Super Cup shares. Unfortunately for Starbucks, those shares are held by Abe, Baker, and Charlie (5% each) and they do not want to sell. The Super Cup constitution does not allow for expropriation of member shares. Starbucks decides to acquire these shares by using its voting power to pass a special resolution altering the constitution to allow any member with 85% or more of issued shares to compulsorily acquire all other issued shares. Starbucks attempts to justify this alteration by claiming it will result in administrative savings and tax advantages for the company. Starbucks provides notice of its intent to expropriate the shares in accordance with the company constitution and standard industry practice. It offers to pay Abe, Baker and Charlie the price that they initially paid for the Super Cup shares when they invested seven years ago. Abe, Baker and Charlie are angry and refuse to sell their shares.

REQUIRED: Will Starbucks be able to successfully change the constitution? Will it be able to expropriate any or all of the shares held by Abe, Baker and Charlie? Why or why not? Please fully explain your answer citing Australian case law and the Australian Corporations Act. Answer: Issue: Is whether Starbucks successfully change the constitution of the company and takes over the shares held by Abe, Baker and Charlie. Rules and Application: According to the case Gambotto v WCP (1995) 182 CLR 432 The High Court found: Where the change affected a minority, the court said that is was valid if ● It is for a proper purpose, and ● Fair in all the circumstances. The concept of fair is normally about the value of property taken. Someone independent will determine the price of shares transferred. Proper purpose means benefit to the company if the transfer occurs. Also, the court said doing something for tax and administrative purposes was not a proper purpose and therefore the change was invalid. Therefore, the alteration that Starbucks attempts to justify is not for a proper purpose. Also, that change is not fair for other members when Starbucks offers to buy the shares of Abe, Baker and Charlie at the price of 7 years ago, the shares should be valued by an independent party. However, if A, B or C is simultaneously holding shares of competitor company and this is prohibited in Super Cup constitution, then he has to transfer his shares to Starbuck. The purpose of this transfer is to protect confidential information of Super Cup (this is clearly a benefit for the company) as its member has the right to a copy of the financial statements. Conclusion: It is unlikely that Starbucks will be able to expropriate the shares held by other members....