Corporate Finance Dividends - Assignment Example

Problem 1: Member’s remedies Issue Does George Brush a minority shareholder have a remedy against the oppressive conduct of Colour Paints Ltd directors? Rules Shareholders who claim they have been oppressed by the company, directors or a group of shareholders can seek relief under section 232 of the Corporations Act 2001 (Cth) (the Act). Section 232 asserts that a court may make orders in favour of members of a company, if the company’s conduct is: “contrary to the interests of the members as a whole; or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or member”1. The section protects members from oppressive conducted, actual or proposed acts, omissions and resolutions2. Section 232 operates in conjunction with Section 233 which allows courts to make any appropriate orders to remedy any oppressive conduct against any members of the corporation3. Application In determining whether a corporation acted oppressively against minority shareholders, the court crucial consideration for courts is the purpose of forming the company4. When Colour Paints Ltd was formed its purpose was to unite small paint dealers so they could purchase paints at lower prices. George Brush therefore joined the company with the intent of obtaining paints at the same prices as large paint retailers. However, the larger retailers in Paints are seeking to raise the prices for smaller retailers above the prices paid by large wholesalers. Clearly, this resolution is unfair and oppressive to the George Brush and other minority shareholders who are now supposed to pay an extra 15% from a company they formed to enable them to buy paint at the best prices. According to Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042, a corporation’s conduct is judged to be oppressive, if it is inconsistent with the benefits the member expected to get by joining the corporation5. As seen in Ample Source International Ltd v Bonython Metals Group Pty Ltd; Re Bonython Metals Group Pty Ltd (No 6) [2011] FCA 1484, minority shareholders can obtain relief, if instances of oppression are found in the conduct of the corporation6. In the case, Ample Source, the minority shareholder had been excluded from management of Bonython Metals Group Pty Ltd (BMG), the directors had failed and reluctantly provided information to Ample Source, they also arranged meetings in a way that denied Ample source the opportunity to attend, they also excluded Ample source from the management of the company as Nominee directors. Similarly, George Brush as the minority shareholder of BMG can seek relief as the director’s resolution is inconsistent with the original purpose of forming the company. The directors conduct is also commercial unfair as this would mean the smaller paint retailer in Paints would obtain they paint at higher prices7. Under Section 233, the court can make any orders that are appropriate to remedy the oppression of a minority shareholder8. In this case, the court would most likely nullify the resolution to offer smaller retailer paints at an additional 15% as compared to the prices the larger retailers will pay. Conclusion Directors of company must be aware that minority shareholders have unalienable rights in relations to how the affairs of the company are run. In particular, courts will be inclined to side with minority shareholders, if the resolution or conduct in question is contrary to the original purpose of forming the company. Thus, Directors must conduct the corporation’s affairs in a way that is fair and non-oppressive to the company’s minority shareholders. In this case, the directors are seeking to increase the prices of paints for smaller retailers contrary to the original purpose of forming Colour Paints Ltd. Courts will rule in favour of George Brush as his intention in joining paints was to obtain his paint supplies at the same price as large paint retailers. Problem 2: External Administration Issue? What options do members and/or directors of an insolvent company have? Rules Companies that know they will become insolvent or are having some insolvency problem have a number of options: Under Part 5.1 of the Corporations Act, an insolvent company can enter into an arrangement or compromise with creditors to allow them to trade out of trouble and retain control of the organization9. Secondly, an insolvent company can choose the option of voluntary administration as provided for by Part 5.3A of the Corporations Act10. Thirdly, members and directors of an insolvent company can opt to voluntarily wind up the company as provided for by part 5.5 of the Corporation Act 200111. Application An arrangement or a compromise is an option that is most appropriate for business experiencing cash flow problems but will recover soon after12. The arrangement or compromise legally binds the company’s creditors to postpone claims for their debts and allow the company to continue trading out of trouble13. Usually, the company in trouble is given a period of 5 years to repay the creditors. An arrangment becomes binding on all the creditors of the company if 75% of the agree to be bound by its terms. Coco Pty Ltd can negotiate a compromise with their creditors to allow them to deal the company’s cash flow problems. Coco would be in a good position to argue for a compromise as it cash flow problems are arising from the late payment of invoices by their suppliers14. A compromise or an agreement will protect the company from claims by its creditors to allow the company to continue trading. Voluntary administration as provided for by under Part 5.3A of the Corporations Act 2001 is another good option for insolvent corporations. Company that go under voluntary administration may benefit as the law insists on administrators doing everything possible to ensure the business remains in existence15. Coco Pty Ltd and it directors can choose to place the company under voluntary administration. Under this scheme, the company cannot be wound up as provided by section 440A of the Corporations Act 200116. Courts have the power under section 440A to postpone ant application for winding up the company or for appointment of a provisional liquidator. Part 5.3 also prevent creditors and other party from making claims or bringing proceedings against the company for its debt liabilities17. Another option for company experiencing insolvency is to go into receivership. In this case, the company is turned over to a receive manager whose main aim is to run the company to repay the debts of a major creditor18. Receivership is meant to protect the interest of both directors and creditors. Under receivership, Coco Pty Ltd will continue trading to pay the debt owed to East Bank Ltd. A final option for Coco Pty Ltd is to wind up the company voluntarily. Winding up involves liquidating the company’s asset and redistributing the financial value realised among the company’s creditors19. Liquidation seems to be the favoured option by Mary who is seeking to sell her stake in Coco Pty and move to another industry. The three shareholders and directors of Coco Pty may pass a director’s resolution to wind up the company. Where the members resolve to repay or debt owed to creditors and their interest the company is said to have undergone a Members’  voluntary liquidation (MVL)20. In contrast, a liquaidation intiated by members resolution but controlled by creditors is known as Creditor’s voluntary liquidation (CVL)21. Conclusion An insolvent company has several external administration options depending on the kind of cash flow crisis affecting the insolvent firm and the willingness of creditors to compromise. A compromise or agreement is arguably the best option for Coco Pty Ltd as they can be able to retain control of the company and trade out of their cash flow problems. Part B: Problem 1: Contracting with Companies Issue Is Electrics Ltd bound by the purchase contract entered on its behalf by Smith? Rules Section 126 of the Corporation Act allows company officers and other individuals enter into binding contracts on behalf of the company, if they have express or implied authority of the company to enter into contracts22. At Common law, a person dealing with a Corporation as set in Royal British Bank v Turquand' (1856) 6 E&B 327 does not need to concern themselves with the company internal procedures to find out if the agent of the corporation they are dealing with has the capacity to contract on behalf of the corporation23. In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, it was ruled that a company may be bound by an agent acting within implicit authority if the following conditions are met24: 1. The company makes a representation to the outsider that the agent has authority to act on behalf of the company. 2. The agent is conferred with authority to act on behalf of the company by another agent who has explicit authority to act on behalf of the company. 3. The outsider relies on the holding out of the company agent to enter into a contract; 4. The contract’s undertaking falls within the scope of the company’s operations. Application As set out in Section 126 of the Corporation Act 2001(cth), officers of the corporation have the legal capacity to bind the corporation to contracts with outsiders25. Smith and Jones are Director and Chairman of Electric Ltd and thus may be judged to have the authority to act on behalf of the company. To any outsider, a person with the title of director will ordinarily have the legal capacity to enter a contract on behalf of a company26. Therefore, Jones had the authority to act on behalf of Electric Ltd as the company held him out as its director. When Jones said that “Smith is able to finalize the deal” he also held out Smith as an agent of the company with authority to act on behalf of the company. The test for implied authority set out in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 is easily met in this case. First, the company holds both Smith and Jones as agents of the company who have authority to act on its behalf27. Smith’s title as director is enough to induce an outsider to believe he has authority to act on behalf of the Corporation. Secondly, the Dealer assumes that “Smith is able to finalise the deal” as asserted by Jones. Relying on this holding out, the Dealer signs a deal for the purchase of electrical equipment. The Dealer may not even need to prove the test described above as “the indoor management” rule allows outsider to bind companies into contracts, if it is reasonable to assume the person they are dealing with has the authority to act on behalf of the company28. The ruling in Freeman and Lockyer means outsiders can bind companies into contract regardless of whether the agents they are dealing with has been authorized to act on behalf of the company. Conclusion Electrics Ltd will be bound by the contract with the dealer entered on its behalf with the dealer by Smith. Smith was held out as an agent of the company by Jones, a company director. In addition, the dealer can rely on the indoor management rule which allows outsiders to assume agents of the company have authority to act on it behalf. The indoor management rules asserts that the affected outsiders do not need to check internal company procedures that authorize outsiders to act on behalf of the Corporation. Problem 2: Contracting with Companies Issue Is Heritage Ltd bound by the contract for purchase of armored vehicles worth $100,000 from Canberra Van Rentals & Sales Ltd? Rules According to Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd, an outsider can rely on the assumption an agent of a company has the authority to act for the company as the authority appears to him29. Diplock LJ in the case asserted that three requirements have to be met for an agent to be reasonably assumed to have implied or Ostensible authority: a) Holding out; the principal must have made some representation or acted in a way to suggest that the agent has authority to act on behalf of the company. Acquiescence by board is one of the most common holding out especially for executives such as managing directors. b) Holding out must be done by someone with actual authority: the holding out must be done by the company or by someone with actual authority. c) Reliance on holding out: the person entering into contract must rely on the representation that the agent has authority to act on behalf of the company. Applying the Indoor Management rule means the outsider may not need to check whether the holding out was done by a person with actual authority. As set in Royal British Bank v Turquand' (1856) 6 E&B, an outsider does not need to check whether internal regulation or management procedures have been fulfilled in order for the agent to gain authority to act on behalf of the company30. Application In our case, it would be easy to prove that Mary had actual implied authority to act on behalf of Heritage Ltd. The first requirement for implied authority involves checking whether the Mary had been held out as an Agent of Heritage Ltd. By appointing Mary as their managing director, the board of Heritage Ltd were holding here out as having the authority to act on behalf of the corporation. Moreover, Mike Smith, Managing Director of Canberra Van Rentals & Sales has dealt with Mary as the managing director of Heritage Ltd. Therefore, Mike can assume that Mary has authority to act on behalf of Heritage Ltd through “course of dealings” as set out in Hely-Hutchinson v Brayhead Ltd [1967] 1 QB 54931. Secondly, the holding out of Mary as the managing director of Heritage limited was done by the company’s board. The board has actual authority to enter into contract on behalf of Heritage Ltd. Thirdly, Mike relied on the implication that Mary as the managing director of Heritage Ltd has the authority to act on the company’s behalf. Mike is also protected by the indoor management rule as regard Mary not been confirmed as the managing director of Heritage Ltd since 199732. In addition, Heritage Ltd’s requirement that contracts above $50,000 be given board approval will not affect the contract. As per Royal British Bank v Turquand' (1856) 6 E&B 327, these two issues above are Heritage Ltd’s internal matters that should not concern an outsider entering into contract with Mary as the designated agent for the company33. Conclusion Heritage Ltd is bound by the contract for the supply of armoured vehicles at the price of $100,000. Mary who was acting on Heritage Ltd’s behalf was held out to the public as the managing director of the company. Therefore, Mike could rely on the indoor management rule to bind Heritage Ltd to the contract made by the company’s agent. Problem 3: Corporate Finance Issue Does XYZ Company vary class rights by issuing an additional 2000 cumulative shares? Rules Section 246C, subsection 1 asserts that any issue of shares which results in new class of shares with different rights is considered a variation of class rights34. Application XYZ capital structure consists of 5 000 fully paid ordinary shares, issued at $ 2 in 2001. XYZ also raised 5% preferential capital consisting of 5,000 fully paid share issued at $ 5. The 2,000 cumulative preference shares the board decides to issues have different rights with the existing two classes of shares. Conclusion The issue of the cumulative preference shares is a variation of class rights under section 246C. Issue Can the preference shareholder demand dividends? Rules Section 245T, subsection 1 sets out requirements for companies to fulfil in order to declare dividends35: a. The company assets must exceed its liabilities. b. The issue of dividends must be fair to all shareholders; c. The issue of dividends must not prejudice the company’s ability to services its debts. Application Companies do not have any obligation to pay dividends to preference shareholders in a year where dividends have not been declared36. Preferential treatment for preferential shareholders only comes into play when the conditions for declaration of dividends are fulfilled as set out in Section 245T. Problem 3: Corporate Finance Dividends Issue Can preference shareholder demand dividends for years where no dividends have been declared? Rules Under Section 254V, a company cannot incur a debt in connection to dividends if it does not declare dividends in that year37. However, cumulative preference shares have the advantage of accumulating dividends for years when no dividends are paid and claiming them when dividends are finally paid38. Application and conclusion XYZ Company had not declared any dividends between 2010 and 2012 and therefore the non-cumulative preference shareholders cannot demand dividends for this period. In contrast, the cumulative preference shareholders can claim dividends for 2010 through to 2012. Issue Can the preference shareholders participate in the sharing of profits beyond their dividend interest rates? Rules The dividends of preferred shareholders do not increase with profits39. However, participating preference shares can participate in sharing of profits. Application and conclusion The shares of profits for preferred shareholders are limited to their interest rates. XYZ has no participating preference shares and thus none of the preference shares can participate in sharing profits.   Issue Does a creditor have any remedies in case a company issues dividends that threaten the solvency of the company? Rules Under Section 245T, subsection 1, a company may not issue dividends, if such an action prejudice the company’s ability to service its debts40. In addition, Section 588G, subsection 2 asserts that a person who prevents a company from incurring a debt that results in insolvency commits an offence41. Company directors are not allowed to pay out dividends, if the debt incurred would make the company insolvent. Application The creditor may prevent the distribution of the $100,000 in dividends as this will lead to the company becoming insolvent. Under section 245T and 588G, directors are not supposed to declare dividends, if the debt incurred threatens the solvency of the company42. Conclusion Creditors can move to block distribution of dividends that threaten company ability to services its debts. Problem 4: Omission and Misstatement in Prospectors Issue Is there a remedy against United Industries for the misstatement and omission in their prospectus which optimistically predicted a profit in two years? Rules Section 728 of the Act asserts that it is an offence to offer a prospectus to the public if there is a misstatement or omission in the document43. Subsection 2 directs that all statements about future matters must be based on reasonable ground. Section 728 operates in conjunction section 18(1) of the Competition and Consumer Act 2010 (Cth) which makes it an offence for persons to engage in misleading or deceptive conduct in trade or commerce44. One of the most important requirements to prove misleading or deceptive conduct is reliance by the victim on the misstatement. Section 729 allows a person to recover damages incurred as a consequence of relying on misstatement or omissions contained in company prospectus. Application United Industries and their accountants Lofty &Gray are liable for misleading and deceptive conduct under section 728 of the Corporation Act and Section 18(1) of the Competition and Consumer Act 2010 (Cth). United Industries intentionally claimed it would turn a profit in two years and guaranteed that over 50,000 visitors would visit their hotel chain. However, this information was optimistic and unfounded45. Lofty&Gray as their accountant vouched for the accuracy of the information although there were no grounds to believe the information to be accurate. However, Bob Broke cannot rely on the misleading or deceptive conduct remedies as he had already accepted the shares offered to him before the misrepresentation was made. Thus, Bob Broke cannot prove his decision to buy shares arose from reliance or inducement by the misrepresentation. If Bob Broke could prove that he was deceived or induced to buy United Industries shares, he would have been able to recover his losses under section 729. Conclusion Companies and their financial advisors while raising capital by issue of prospectus must not engage in misleading or deceptive conduct as this may allow some members to recover share capital contributed to the company through section 728. Bibliography A. Articles/Books/Reports Latimer, Paul. Australian Business Law 2012 (CCH Australia Limited, 2012) R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 15th ed, 2013) 714. Tomasic, Roman; Stephen Bottomley, Stephen & Queen, Rob, ‘Corporations Law in Australia’ (Federation Press. 2nd ed, 2002). B. Case law Ample Source International Ltd v Bonython Metals Group Pty Ltd; Re Bonython Metals Group Pty Ltd (No 6) [2011] FCA 1484 Australian Securities and Investments Commission v Hellicar [2012] HCA 17 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Hely-Hutchinson v Brayhead Ltd [1967] 1 QB 549 Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042 Royal British Bank v Turquand' (1856) 6 E&B Royal British Bank v Turquand' (1856) 6 E&B 327 C. Legislation Competition and Consumer Act 2010 (Cth) Corporations Act 2001 (Cth) Read More