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Opinion To: Law Firm Re: Minority Shareholders of ArrowCar Ltd. Date: Background: The firm represents the minority shareholders of Arrowcar Ltd. who hold 45 per cent of the shares in ArrowCar. The 45 per cent shareholders seek advice on the arbitrary acts by the majority shareholders, who have adopted a policy that advances environmentally safe cars rather than the maximisation of profits…
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Download file to see previous pages Legal Issues: The issue relative to the decision to limit shareholders’ dividend by the majority shareholders who sit on the board of directors raises the question of corporate social responsibility and how that impacts directors’ duties. Corporate social responsibility dictates the extent to which directors should take account of all stakeholder interest including non-shareholders. The issue relative to the $20 million investment in the subsidiary and tripling the wages of assembly wages in the Vietnam subsidiary raises questions pertaining to the extent to which directors’ duty toward the company’s best interest is breached by such an investment. If the payment is considered gratuitous it will not be considered in the best interest of the company. Another issue is whether or not the minority shareholders can take derivative action against the directors for the company. Each of these issues are considered below. A. Corporate Social Responsibility Corporate social is not specifically provided for in Australian company legislation. The Australian Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) 2006 states that Australia’s primary company statute allows “directors to have regard to the interests of stakeholders other than shareholders” and as a result the current legislation does not need to be amended to specifically provide for it.1 For this purpose, non-shareholder stakeholders are employees, creditors, clients, the industry and the impact of company decisions and products on the “surrounding social and natural environment”, the state and the wider community.2 By virtue of the common law and Section 181 of the Corporations Act 2001, directors have a fiduciary duty to act in the best interest of the company.3 The main question is whether or not the best interest of the company includes the interest of non-shareholder stakeholders. Some guidance can be found in the common law. The investment of the $20 million in the Vietnamese subsidiary is considered by reference to Parke v Daily News Ltd. In this case, the company attempted to pass a resolution permitting the payment of benefits to former employees of the company. It was ruled that the proposed payment was entirely gratuitous and therefore ultra vires the company’s objectives.4 Similarly in Re Lee, Behrens and Co. Ltd the court held that the payment of an annual pension to a former director’s widow, was: Expenditure of the company’s money and that money can only be spent for the purposes reasonably incidental to carrying on of the company’s business.5 Eve J. devised a test by which to determine whether an expenditure or investment was in the company’s best interest. First, it must be ascertained that the transaction was “reasonably incidental to the carrying on of the company’s business.”6 Secondly, the transaction must be bona fide and thirdly, it must be done for the “benefit and to promote the prosperity of the company.”7 Although the cases cited above are English, they have been used by the Australian judiciary. For example in Woolworths v Kelly, Mahoney JA stated that: A company may decide to be generous with those with whom it deals. But I – put the matter in general terms – ...Download file to see next pagesRead More
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