Corporate Fundraising - Case Study Example

Corporate Fundraising Table of Contents Table of Contents 2 Question 3 Area of Law Legal Issue 3 The Relevant Laws 3 Application of the Law 4 Conclusion 5 Question 2 6 Area of Law/ Legal Issue 6 The Relevant Law 6 Application of the Law 7 Conclusion 9 References 10 Question 1 Area of Law / Legal Issue Green Coffee Company Limited is a kind of public limited company, based in Australia. It has decided to expand its business by an expansion program in Vietnam. The legal issue in this context deals with the fundraising obligations in accordance with Corporations Act 2001 (Cth) (AustLII n.d.). This is because the company has to abide by the postulated regulations as per this Act to raise funds from the country and outside the country. The Relevant Laws Green Coffee Company Limited a Fair Trade and Rainforest Alliance certified company, thus it has earned a significant extent of goodwill over the years (Rainforest Alliance 2013). In this regard, issue offer (sec 706), sale offer (sec 707) of securities need to be disclosed. In case of right issue, disclosures are not necessary (sec 708AA), apart from the disclosures on sale offer under section 707, there are certain sale offer which do not need discloses (sec 708A). Corporations Act 2001 prohibits the organisation which raises funds to execute its endeavour without the proper disclosures of the documents (Section 727) (AustLII n.d.). If an organisation offers 20 issues in 1 year then the publicity and the advertisements for issues will be restricted fir them. Prospectus issued by the company, in this case Green Coffee Company Ltd, will be a very important document relating to investments. Prospectus protects the investors by educating them regarding the investment proposals. Australian Accounting Standards Board continuously closely observes the work of the capital markets and makes amendments on the rules prevailing in the countries whenever necessary. On the other hand, Australian Securities and Investments Commission (ASIC) works as a legislator and regulator. With regard to fundraising, Green Coffee Company Ltd needs to disclose various kinds of documents (sec 705). In case of full disclosure made in prospectus, a company needs to include the terms like content (sec710, sec 711, sec 713), procedure (sec 717), liability (sec 728 and sec 729) and defences (sec 731, sec 733); sort form of prospectus only needs to disclose its content (sec 712) (Thomson Playford 2006). Certain other kind of documents includes profile statement (sec 721) and offer information statement (sec 709). Details are given in the website of Commonwealth Consolidated Acts namely “www.austlii.edu.au”. Disclosures are not necessary when $10 million (includes the received amount at past) or less is the targeted amount (ASIC 2012). Application of the Law Green Coffee Company Ltd. desires to expand its business in Vietnam. Investment in foreign country involves a substantial proportion of capital expenditure. Capital formation of an organisation includes debt financing and equity financing, which constitute capital structures of the firm. An optimum capital structure provides the firm better results. It is a registered company, for this reason it has to carry out its fundraising activities in consideration with the Chapter 6D of the Corporations Act 2001 (Cth). As it is a public limited company so it has the opportunities to raise funds from the country which helps this organisation in terms of its expansion program. Before the distribution of the prospectus in the market, Green Coffee Company Ltd. has to ensure that it is providing its financial data which are correct from all the ends. The company also needs to evaluate the future earning potentials of the firm in respect of Vietnam. Vietnam’s guidance for the operations needs to be scrutinised. Forecasting techniques for cash inflows and outflows has to be compared. Owing to the reason that Chapter 6D deals with the fundraising activities, thus at the time the preparation of prospectus certain aspects need to be take into consideration, such as coverage on the fundraising rules are depicted in section 700, treatment of offers on securities are stated in section 702. Section 703 deals with the condition of a specific contract for the purpose of sale, or the issue of securities which is considered to be void in certain circumstances. The reason for the void of this contract is stated in section 703. There should be a certain degree of accuracy in terms of disclosures. The company also needs to consider the ‘stop order’ mechanism provided by the ASIC where ASIC can prevent the offer made by the company in case it contains a misleading descriptive kind of document or after issuing an offer document if new circumstances arise (AustLII n.d.). On the submission of the disclosure documents, it should be submitted with the proper fees to the ASIC Regional Office of the state if it is sent by a courier operator or by post and to the ASIC Service Centre if submission is done by hand. The company also needs to meet the features of the regulatory guides offered by ASIC such as “RG 1-20, RG 21-40, RG 41-60, RG 61-80, RG 81-100, RG 101-120, RG 121-140, RG 141-160, RG 161-180, RG 181-RG 200, RG 201 - RG 220, RG 221” (ASIC 2013). Conclusion Green Coffee Company Ltd. can definitely raise its funds from the public if it satisfies the above sections and regulations made by the Commonwealth Consolidated Acts and the ASIC respectively. Question 2 Area of Law/ Legal Issue This section in terms of legal issue mainly focuses on the obligations for the disclosures of the offer documents. It also explains the duties and liabilities of the Green Coffee Company Ltd, the directors of Green Coffee Company Ltd, and Leaping Lizard Coffee Pty Ltd. The Relevant Law Companies involved in fundraising activities are bound to comply with the sections relating to sec 708, sec 708A and sec 708AA stated in the Corporations Act 2001 (Cth). The violations or the breach in the disclosure documents are subject to punishment, penalties and prohibition. Prohibitions and liabilities relating to the violations of the disclosures are stated in the part 6D of Corporations Act 2001. The prohibitions include disclosing regarding a company which does not exist (sec 726), disclosures without the attachment of a current document (sec 727), misstatement and omission on disclosures (sec 728), an investor may recover the respective damages, which result from contravention (sec729), deficiencies of disclosures in the offer statement brings also liabilities (sec 730), restrictions are there in case of publicity and advertisements (sec 734) and hawking is another restrictive offence (sec 736) (Pearson 2009) The company also enjoys some defence options such as diligent defence for the prospectus (sec 731), deficiency of knowledge showed in providing information statement and profile statements (sec 732) and common defences for all disclosure related documents (sec 733) are a few of them (Pearson 2009). Application of the Law Green Coffee Company Ltd. disclosed full information in the documents so it will not be liable under section 708, but for the satisfaction of the investors and to retain the goodwill of the company it has to conduct an intensive investigation within the organisation. This will also prove whether the directors are responsible for this scam or not (Sheldon 2000). As some manipulation happened in the company so the company should disclose the name of its directors to issue a notice that contains the permission by the directors to publish a misleading and wrongful prospectus. The company also needs to disclose the name of the external accounting body if it hires them for the financial analysis of their businesses. The board of directors are responsible for the operations and management of the company, but powers which have been allocated to them, are limited (sec 198A and sec 198A [2]) Duties of directors involved in the context of disclosures of documents are clearly explained in the case of ‘ASIC v Healey [2011] FCA 717’. As per this case, in the month of October 2009 Australian Securities and Investments Commission (ASIC) started its proceedings against the six non- executive directors and the two executive directors of the Centro group for violating in the disclosure process. They disclosed wrong information in their consolidated financial statement such as it disclosed $1.5 billion debt as its noncurrent liabilities instead of its disclosures as current liabilities along with was incapable of disclosing US$1.75 billion in terms of its guarantees. ASIC filled cases against its directors for the breach relating to sec 344(1) where directors, disclosing entity and registered scheme of a company fail to take reasonable action to comply with the Part 2M.3 or 2M.2, or section 324DAB, 324DAA or 324DAC (Australian Institute of Company Directors 2011) Directors of a company have duties such as to act in a ‘good faith’ and to act for a proper purpose. Directors will be liable for the punishment if allegations against them are proven in the court. Similarly, directors can defend themselves by applying section 731 and section 734 relating to accusation by referring to 731 and 733 of the Corporations Act 2001 (Cth) (Surgeon 2003). If directors disclose that the company hired an external accounting body for all its financial work then they can be responsible for that purpose. In addition to this, directors may defend themselves by applying section 732 and section 733 for the reasons of lack of knowledge and general defence respectively (AustLII n.d.) In terms of the rights of the investor are concerned, there are a few remedies for the investors, such as right to have the invested money returned and right to withdraw money from the investments (sec 737) and securities can be refunded or returned from the guilty company by the subscriber of the shares or the investors (sec 738). In this context, only manipulation was done with the numbers and information of the disclosure documents, for this reason Leaping Lizard Coffee Pty. Ltd may take necessary legal action against the Green Coffee Company Ltd. and/ or against its directors. Among the other investors of this company Leaping Lizard Coffee Pty. Ltd. had subscribed shares worth $3000 (which includes 5000 shares of $0.60 each). Due to the manipulation in the prospectus and the global drop down in prices of coffee, the value of the subscribed company went down. In that circumstance, Leaping Lizard Coffee Pty Ltd. sold all its shares of Green Coffee Company Ltd. for $500 (which includes 5000 shares of $0.10 each). This caused a loss of $2500 due to the lack of investor’s awareness regarding the fraud prevailing in that company. Conclusion Leaping Lizard Coffee Pty Ltd has certain definite liabilities and rights. However, the fraud or manipulation prevailing in the Green Coffee Company Ltd. will affect negatively the goodwill of the company, its directors and stakeholders as a whole. Thus, necessary actions need to be taken by the company at an immediate effect to ensure that the shareholders’ interest remain intact. References AustLII. n.d. Corporations Act 2001. http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/. AustLII. n.d. Corporations Act 2001 - SECT 700. http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s700.html. ASIC. 2012. Raising funds. http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Fundraising. ASIC. 2013. Regulatory guides. http://www.asic.gov.au/asic/asic.nsf/byheadline/Regulatory+guides?openDocument#41-60. Australian Institute of Company Directors. 2011. Centro Case Summary ASIC v Healey & Ors [2011] FCA 717. http://www.companydirectors.com.au/~/media/Resources/Director%20Resource%20Centre/Governance%20and%20director%20issues/case%20summary/ASIC%20v%20Healey%20Centro%20Directors%20Federal%20Court%20Judgment%20%2027%20June%202011.ashx. AustLII. n.d. CORPORATIONS ACT 2001 - SECT 179. http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s179.html. Pearson, Gail. 2009. Financial Services Law and Compliance in Australia. Melbourne. Cambridge University Press Rainforest Alliance. 2013. Transforming Business Practices. http://www.rainforest-alliance.org/about/business-practices. Sheldon, K. Scott. 2000. Successful Corporate Fund Raising: Effective Strategies for Todays Nonprofits. New York: Wiley. Surgeon, Peter. 2003. Corporate Governance and Directors’ Duties in Australia. Corporate Governance and Directors’ Duties 2003. 21-29. http://www.afic.am/CG/CorporateGovernanceAndDirectorsDutiesInAustralia.pdf. Thomson Playford. 2006. Fundraising and the Corporations Act. http://www.thomsonslawyers.com.au/awms/Upload/Files/publications/2006/ALERT-%20Fundraising%20and%20the%20Corporations%20Act%20-%20November%202006.pdf. Read More