Analysis of Corporate Law - Case Study Example

1 ESSAY LAW All the facts of this case clearly points points out to a close corporation that was entered in by spouses Paul and Mary Scott. First the intention to keep the business as a family corporation involving the spouses and the three children is at once evident (Organisation For Economic Corporation and Development 2006, p. 26). Nowhere is there an intention indicated, tacit or explicit to involve in the corporation people who are not related to them by blood. Instead, we can read from the minds of the spouses Paul and Mary, the intention to maintain control of the corporation by family-related stockholders to the first degree of consanguinity. Thus, from all appearances the corporation is indeed a close one. If it was not stated that the spouses Paul and Mary had registered the company in 1980 with the name Scott Enterprises PTY. Ltd., the first thing that would come to the mind is that the spouses must have formed a partnership instead because the business originally involved only the two of them i.e. the spouses. Most partnerships involve only two business partners (Clifford 2006, p.7). But such is not the case here, although if I were the spouses' adviser at the time they contemplated to form a business entity, I would have suggested a partnership instead because a partnership is simpler and entails no further elaborate requirements to satisfy the requirements 2 of the Corporation Act. Besides, it entails less expenses than incorporating and gives them more leeway and freedom of action than incorporation, which puts one to the reins of government control. If the spouses chose partnership instead, either Paul or Mary can bind the partnership by any legitimate contract in the ordinary course of business of their manufacturing concern. But probably, the spouses had in mind the future of the company. Perhaps, they had thought of the possibility that someday they might be forced to retire from the business due to old age, debility, sickness, incapacity or even worse death to any or both of them (Humphreys 1998, p.6-1). Corporation provides more stability because it affords the right of succession, in which case if any of the above occurs, they can safely ensconce the corporation in the hands of the three children - Suzy, Peter and Sam (Dine 2000, p.101). A corporation ensures continuity and permits transfer of shares of their stocks to the three children if any of the above happens. Perhaps, the spouses want to see the company they laboured hard to put up go a long way and they desire to experience the fruits of their hard work when this company is already in the hands of their children. A corporation just cannot be dissolved voluntarily because it requires a vote of two thirds of the stock and its dissolution can only take place by some judicial or administrative act of the government ( Davis 2000, p.6). 3 The form of corporation can only be a close corporation because all of the corporation's issued stocks are held of record by only 5 persons, with the three children holding each 30% of the shares and the 10% share being retained by the spouses. Although the case is silent about any action to make a public offering of the shares of the corporation or to enlist the corporate shares in any stock exchange, yet the tenor of the case strongly suggest that the spouses never did any of these acts nor have any intention to make one in the future (Moye 2004, p.209). The resolve to keep the business within exclusive family control is so strong we can just surmise that the spouses will never permit transfer of the stocks outside of the family and had in fact made moves to make this an impossibility and this can be done by putting restrictions on transfer such as including such restriction in the articles of incorporation or constitution of the corporation and in the certificates of stock or even in the by-laws (Mancuso 2007, p.17). This must be done in order to bind third persons or any purchaser in good faith. The fact that the business is a manufacturing concern removes the last block of it being not a close corporation because if the nature of the business is such that it is vested with public interest as for example when it is a bank or a public utility or educational institution or an insurance company or even an oil or mining company, then it can never be a close corporation. 4 All of the above businesses are affected with a public interest (Hancock 2004, p.312). The fact that the spouses Paul and Mary had changed the ownership and governance of the manufacturing business by taking in Suzy, the eldest daughter as one of the directors and to train her to manage the company with the aim that she should eventually take ovcer the reins of the corporation, signal strongly that the continuity of the business is exclusively limited within the family and that they have no intention of welcoming any outsider or outsiders to interfere with the management of the business and to share to whatever fortune that the business may bring. This is also a veiled spur on the children to do their best in the active management of the business because the parents are not expecting any outside help in the management of the company. Whether the business prospers or not is ultimately in their hands (O'Neal 1971, p. 4). It can also be conjectured that the two sons Peter and Sam could either be minor children or if not they have their hands full with their studies because if not, they should also have been included as directors of the firm. Both can also participate fully in the management of the business in the near future because a close corporation is also deemed a "de facto partnership with a corporate shell". This means that the constitution of the corporation may in the future allow them to take an active management because close corporations are allowed to do away 5 with the board of directors and vest management of the business to the stockholders themselves (Bartschi 2000, p. 96). That a close corporation also has its disadvantages was revealed when the disagreement ensued among the three children and their parents as to the issue of whether to branch out to a business other than manufacturing. As stated in the facts of the case, the constitution of the corporation of Scott Enterprises Pty. Ltd. Expressly limits the activities of the corporation solely to manufacturing. In other words, the prime purpose of the corporation as written in its constitution is the manufacturing of a particular product. Implied is the fact it contains no secondary purpose. Therefore, there is only one way that the corporation can branch out to another activity other than manufacturing and that is to amend the constitution or the articles of incorporation. In a usual corporation, amendment of the constitution is effected by a majority vote of the board of directors and the vote or written assent of the stockholders representing at least two-thirds of the outstanding capital stock without prejudice to the appraisal right of dissenting stockholders (Schneeman 2001, p.423). But since Scott Enterprises Pty. Ltd. is a close corporation, then the amendments to the constitution must be decided upon by the stockholders themselves. There is no need for any board of directors' participation when another purpose 6 is added to the primary purpose. What is required for the approval of such move is a vote of 2/3 of the outstanding capital stock, whether such stocks have voting or non-voting rights. In the case at bar, the activity that the children wish to branch out into is not stated but the Corporation Act expressly provides that a corporation has only such powers as are expressly granted to it by law and by its articles of incorporation (express powers); those which may be incidental to such conferred powers (incidental or inherent powers); those reasonably necessary to accomplish its purposes (implied powers). If the purpose that the children want to affix happens to be one of the incidental or inherent powers or implied powers, then I would advise the children that amendment to the constitution is not necessary. All that must be done is to explain to the parents that such branching out is "reasonably necessary to accomplish its primary purpose". If the parents persist, then I would suggest that they bring the matter to the Australian Security Commission so that the latter may adjudicate on the matter (Morck 2000, p.35). But if it is neither any of the implied or incidental or inherent powers, then there is no recourse but to amend the constitution of the corporation by which case, their vote of 3 as against the parents' vote of 2 should make them victorious in their aim to branch out. But since fighting it out with their parents in such way is disruptive of the filial-parental relationship they have, 7 I would advise them to first talk it over with their parents and if possible convince them or plead to them or apply gentle persuasion. A direct confrontation such as this, should only be a last recourse. And a note of caution, they must be sure that such purpose must not be patently unconstitutional, illegal, immoral, or contrary to government rules and regulations because if it is, then the Australian Security Commission may disapprove such amendment. Prior to such a move, I would advise the children to weigh things out because the parents are determined to have their own way, and that is, to maintain the status quo. Rocking the boat also throws the relationship on the rocks. I would advise them to take a look at the books of the corporation and see if the manufacturing business per se is a profitable business and thus the right move may be not to add a secondary purpose but to buttress and maximise the business, such as enlarging the business, or widening the market by finding more markets to export the company's produce or improving the product by emphasising its R&D (research and design) department or finding a more efficient method of production or going into mass-production of the company product. Branching out may not really be the answer. I would also advise them that if such purpose really consumes them, then probably in the near future, they may put up a sister company that deals with this kind of business. 8 If the children really persists on amending the constitution, I would advise them that the Australian Securities Commission may reject or disapprove of such amendment if the amendments are not substantially in accordance with the form prescribed therein; as for example when there is no notarial acknowledgment; then as we just said if it is patently unconstitutional (it involves human trafficking) or illegal (i.e unlicensed gambling), or immoral (i.e. prostitution) or contrary to government rules and regulations. The Treasurer's Affidavit concerning the amount of capital stock subscribed must also be accurate. Other than these, there are other formal requirements such as that changes made must be properly underscored in the amended constitution of the corporation and a copy of the articles must be duly certified under oath by the corporate secretary to the effect that the amendment has been approved by the required vote or assent of the stockholders. I would also inform the children that if such amendment is effected, their parents have a right to exercise their appraisal right (Kraakman 2004, p. 25). Appraisal right is defined as the right of a dissenting stockholder to demand payment for the fair value of his shares because of a substantial change in organisational set-up of the corporation, not contemplated by him during the time he made his investment in the corporation. In other words, the parents will sever their links with the company and this is not only a ludicrous situation but an unconscionable one, 9 considering that the parents established the company, literally expended sweat, blood and tears to make the company what it is today, then offered the ready made firm to the children in a silver platter only to see themselves repudiated by such children in the end. I therefore advise the children to again think about the amendment option a million times or they may end up bothered by their conscience the rest of their lives, if they have conscience to speak of. If it is true that the constitution has a special provision that is alike to the replaceable rule s198A which states that "a corporation is managed by or under the direction of the directors" (Taylor and Francis Group p.71) and that the directors may exercise all the powers of the company except any powers that this act or the company's constitution (if any) requires the company to exercise in general meeting (Campbell 2007, p.1:24) then in this case which is patently a close corporation, this is of no moment because replaceable rule s198A cannot apply to a close corporation. This can only apply to the usual corporation where the stockholders are numerous. We have to consider that herein there are only 5 stockholders, 3 directors who happen to be closely related to each other by the first degree of consanguinity. In a close corporation, we must remind them that it is the stockholders which actively manage the corporation and the concept of directorship loses importance. As author Moye said, a close corporation is a corporation with only a few shareholders that may "eliminate or minimise the 10 the authority of the board and provide that the shareholders will have the management power" (Moye 2004, p.165). Although the parents may not be correct because in a close corporation they are simply outvoted and the children have the option to amend the articles of incorporation or the constitution, yet the degree of the relationship and filial loyalty and devotion and concern and love for the people whom they owed everything including their own lives and this company itself should prevail. A close corporation is not an ordinary corporation. It should emanate love, respect and sacrifices. Here, it is time for the children to show their love for the parents by giving in to the parents' wishes. 11 REFERENCES Bartschi, M 2000, Foundations of business organizations for paralegals, Thomson Delmar Learning. 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Schneeman, A 2001, The law of corporations and other business organizations, Thomson Delmar Learning. Taylor and Francis Group, Australian essential corporate law, Cavendish, Australia . Read More