The Analysis of The Law of Partnership - Article Example

Name: Institution: Tutor: Date: Corporate Law Workshop: MyFriend Introduction The financial collapse of companies has always drawn attention to the issue of corporate responsibility and accountability internally. A number of pertinent flaws in the regulation of corporate entities often have to be managed from the outset as companies cannot be run on mere trust as they tend to represent people with conflicting interest. This paper represent a case of a company whose collapse was imminent as it lacked direct personal ramification for those in control, specifically where they made poor business judgments based on self-interest (Sernia and Barkoczy 140). It further provides the basis from which shareholders and the founding partners can seek court remedy. The Law of Partnership and Basic Concepts of Corporations Law a) Joint Venture Bob, Jane, Ted and Alice have not undertaken a joint venture. Even as they are in agreement to start a business, new assets and a new entity by contributing equity, their partnership is not defined by a specific time period. In addition, they do not plan to dissolve their partnership once they attain their goal. To qualify as a joint venture, a business lawyer will argue that a business agreement has to be developed for a finite time and it must have a view of profit as specified by Partnership Act 1895 (WA) section 7(1) (NSW Young Lawyers 4). b) Partnership Bob, Jane, Ted and Alice can be termed as having entered into a partnership. Their business validly falls under the description of a partnership in accordance with the Partnership Act 1892 (NSW). A partnership can be defined as a nominate agreement between persons who agree to start a business in the spirit of cooperation. Usually, they merge their property or resources, skills and have agreement to share profits in accordance with Section 30 of the Partnership Act 1895 (WA) that any property provided must be used exclusively for the interest of the business. Critical elements of the company are that each partner is actively involved in decision-making and is personally held responsible for any debts the business may run into. The partners also personally raise capital from their own resources or loans. According to Partnership Act 1895 (WA), partnership exists when there is a valid agreement to start a partnership between the partners. Before the law, there must also be an agreement towards course. In addition, there must be some mutual obligations, interests and rights. Most importantly, there must be view for profit making, thus it must not be charitable (NSW Young Lawyers 5). c) When the partnership started In view of the Partnership Act 1895 (WA), Bob, Jane, Ted and Alice entered into a partnership. First, their partnership started when the idea to implement the algorithm was discussed. Later, they discussed the profit-making mechanism on how to make money from their idea and came up with a one-page business plan. However, they failed to make equal contributions, an element reflected by Section 34 (1) of the Partnership Act 1895 (WA). The partners in the business included Bob, Jane, Ted and Alice. They held the same stake in the partnership even as each partner contributed an asset. A business lawyer will observe that they were all liable to the debts of the business or would share profits equally in accordance with section 16 of the Partnership Act 1895 (WA). The partners agreed that the firm’s name would be MyFriend. Initially, the partnership property was a server, the database and the garage as the business premise. d) Frank’s position Prior to the incorporation, Frank’s was initially a creditor. From the outset, the partners were not in a position to raise enough capital to purchase the server and database. After merging all their resources, they could only raise $5,000, and since they needed another $5,000 if they were to afford the equipment, their option was to seek a loan. Alice later talked to her father who lent the business $10,000 to kick-start the business. Since the money would be paid back, a business lawyer can observe that being a creditor; his loan couldn’t be perceived as a personal contribution that was characterized with all the partners. The loan had to be paid back. e) Ted’s Departure From a business lawyer’s perspective, Ted’s departure and prolonged absence affects his position in the partnership as he ran the risk of being sideline. First, as a partner, he is a major decision-maker in the business. However, that is not the case when he leaved to his Inuit village inside the Arctic Circle. Besides, he does not take part in critical decision-making for the business, as the law requires all partners to do. f) Risks that can be obviated by incorporation When Jane explains the idea of protecting themselves by incorporating a company and the risks they might run into in case they are sued, she is very particular about incorporating the business as a legal entity that can sue and be sued. A business lawyer can argue that the business acquired legal standing before the law, and hence it had the capacity to be held responsible for its own actions and to sue and to be sued (Byrne 46). The basic principle of corporate law stipulates that once the business satisfies the statutory requirements for registration as a company, it becomes a legal treated before the law as independent from the shareholders. Legal entity is protected in section 124 of the Corporations Act 2001 (Cth). g) Legal relationship between the partnership and the new company By incorporating the company, it means the business is transformed into having a legal entity so that it can be sued and sue, as stipulated by Corporations Act 2001 sections 119, 124—125. This gives a business lawyer the basis from which to argue that the individual partners cannot be held personally responsible for misdoings of the business. By registering the business, the partnership is literarily dissolved as new company comes into existence straightaway, as provided for by section 119 of the Corporations Act 2001. However, it can be argued that the partners failed to consider legal procedures as provided by Section 43 (1) of the Partnership Act 1895 (WA), which stipulates terms of dissolution. h) Frank’s potential as a partner Frank cannot become a partner by merely purchasing shares in the company, unless it is agreed by the founding partners, unless it all the partners agree to it. Incorporation Process/Third Parties a) MyFriend as an entity MyFriend is a legal entity, which means it has legal standing before the law and hence it can sue and be sued in the court of law. The consequences of this legal status as provided by Corporations Act 2001 section 516 which specifies that the incorporation restricts the liability of the shareholders. Thus as a general rule, the partners or the shareholders are not held responsible for the debts of the business, instead, if the business is indebted, they will not lose more than their investment. In addition, the company would be taxed differently from its owners which could offer the company some fiscal advantage as the corporate tax tend to be lower than individual tax (Freedman and Finch 5). b) Benefits of incorporation Incorporation has several advantages. First, the personal assets of the founding partners are protected against lawsuits claims or claims by creditor. Thus the founding partners, shareholders, executive officers or directors are not liable for the debts and obligations of the business as enshrined by section 516 of the Corporations Act 2001. In addition, individual ownership of the business can be transferred to other in whole or in part, and the transfer may not be recorded. The business can also raise funds from a larger pool. For instance, MyFriend raised more funds from its employees who were eventually allowed to have shares of the company. It is also more continual indefinitely, meaning the death of one individual or founding partner may not affect the existence of the business (Freedman and Finch 6). c) MyFriend as a company The company came into existence when the founding partners – including Bob, Jane and Alice – agree to have a limited liability by incorporating the company. Later, Jane arranges with her older sister who is an accountant to establish a propriety company to run their business. Consequently, the company is set up with three shareholders, Bob, Jane and Alice who subscribe for one $1 share each. All are appointed directors, and Alice as the company secretary. The registered office is shown as Jane’s home. Corporations Act 2001 provides that a company must have a registered office. d) Improper formation of MyFriend as a company Logically, the company has not been started well as legislations governing the formation of a company have been flouted. For instance, the registered office was not the place the company first operated or had its servers, violating section 147 of Corporations Act 2001. The company also has issued with the corporator – an individual who is allowed to enjoy the benefits and certain rights that belong to other members of the company and who can vote solely in proportion to amount of his shares. Here, Bob, Alice and Jane are seen to have violated the terms of partnership agreement when they excluded Ted (Trachtman 14). This violated the Partnership Act 1895 (WA) Sect 26, which provides that any partner who performs an act in the interest of the partnership should include other partners in the same extent. The company’s shareholders include Jane, Bob and Alice, who subscribe for one $1 share each. Later, the staff also becomes shareholders when each of the owners has to split their existing 1 share into a million shares each, and then issue a few thousand new shares to the employees. Some 40 employees signed up for between a thousand and ten thousand shares each, a total of some 450,000 shares. This makes shareholders to have voting rights in accordance to section 250E of the Corporations Act 2001 specifies that shareholders have one vote per share. Beside, the appointment of the directors is also inappropriate. For instance, the choice of Frank as the managing director is not out of consensus, thus violating Corporations Act 2001. e) Frank’s relationship with and role at MyFriend Frank eventually becomes the most powerful individual in the company as he is seen to make major decisions for the company in accordance with Corporations Act 2001 sections 198A, 198E, 202C, subsection 202F(1). There are issues with granting Frank an option to convert the loan into shares, as it is dishonest and not in the company’s best interest, in compliance with Corporations Act Sections 180-181. In fact, it can be seen as a tactic to gain control of the company by becoming its major shareholder. From the outset, it is perceivable that the four founding partners who hugely indebted to Frank who loaned them $10,000. Once the company begins to make huge profits, the value of Frank’s shares would obviously transform into millions, making a large proportion of the company’s revenue. Thus when he pulls out his shares, or sells them, the company would become more vulnerable to insolvency or selling off major shares to willing buyers, such as OurSpace and Black Night. A business lawyer can argue that he violated Corporations Act Sections 180-181, which provides that directors must act in good faith and in the best interests of the company. The Corporation and Internal Regulation a) Validity of the Director’s Metting The director’s meetings are in contravention of Part 2G.1 of the Corporations Act 2001 (Cth), as the meetings are held without reasonable notice to each director. In fact the meetings seem very spontaneous and unplanned for making it impossible for some members to attend. For the meetings to be properly convened, each of the directors should be given proper and reasonable notice. b) Share issue to the employees Bob, Jane and Alice were the first shareholders in compliance with Corporations Act 2001 section 120, which states that the first shareholders should be those listed during formation of the company. The three offered to conduct share issue to employees properly. This was however not the case. The staff is issued shares based on the length of time they have worked with the company and how many hours they have worked. The basis is improper as this way, the staff are restricted on the number of shares they may hold, basing on the idea that some new workers may feel discriminated upon even as they look to own large quantities of shares compared to the older employees. Most importantly, the company fails to create a share register that lists its shareholders in compliance with Corporations Act 2001 section 172 (Sernia and Barkoczy 140). Beside, the directors fail to record the listing of shares in a new ‘register of shareholdings’. C) MyFriend as a Public Company Though MyFriend becomes incorporated as a public company by changing the constitution of the company and converting their ownerships into shares to fit the description of the company as stipulated by Corporations Act 2001 sections 117—119. The statute provides that a company that is limited by shares must have at least one shareholder. There is also a conflict of interest among the directors on the need to sell major shareholding in OurSpace. The employee shareholders are also against the move. First, Bob and Jane must resign as directors of the company, Bob will assign any interest which he has in the MyFriend algorithm that does not belong to the company, directly to OurSpace, and give a restrictive covenant preventing him from doing any work in the social networking space for 5 years. Secondly, the employee shareholders have come together and agreed that the introduction of OurSpace into the company has produced a very unexpected outcome, and one that looks to be very unfavourable to them (Trachtman 6). The Corporation and Internal Regulation a) Shareholders’ power to call a meeting The shareholders have the power to hold a meeting in accordance with Corporations Act 2001 sections 9 (249A, 249B, 249L, 251A), which gives shareholders the right to pass a resolution through a meeting. Hence, two or more shareholders who hold at least 5 percent of the company’s share capital can convene a meeting. Under section 249D of the Corporations Act 2001, directors must set up a meeting if members with over 5 percent of voting rights write to request that the meeting be held. However, in the case of MyFriend, since there is no share register to prove that they are shareholders, the powers of the shareholders to call the meeting is limited. However, the directors may still call the meeting as obligated by Corporations Act sections 249A—251B. The shareholders’ register does not exist, making it difficult to determine the stock that each employee has on the company, even as record keeping at the company remains chaotic. Denying the shareholders access to share register would be a violation of Section 173 of the Corporations Act 2001 (Cth). However, the shareholders can still ensure that the register is effective and represents all shareholders. For instance, since determination of their shareholding was based on a formula of the length of time each employee had worked on the company, they can used the same formula to determine the shares they own on consultation to the spreadsheet from which the letters were compiled, copy letters and the original corporate paperwork that lie in a box in Alice’s office (Sernia and Barkoczy 140). Further, they can seek legal redress in accordance with section 13 of the Australian Securities and Investments Commission Act 2001, as they have enough proof that the company violated shareholder rights. Several conflicts of interest exist. Alice and Frank have sold their shares against the wills of Jane and Bob. In addition, Alice and Frank have nominated some directors against Jane and Bob’s will. The directors are seen to propagate conflicts of interest against Corporations Act 2001 sections 191-193, which specifies that directors must at all cost avoid conflicts of interest. The employees are also against the move to sell majority of shares to Ourspace prompting them to sign requisition. OurSpace also faces conflict of interest where it is determined to formalize everything including record-keeping against the interest of Alice and Frank, for instance updating shares register. Resolution – The Final Meeting a) The problem with the Board meeting The meeting convened as a result of the shareholders’ notice to call a meeting has a problem, as the employee shareholders are perceived by the new owners of the company (OurSpace and Black Night) as null and void, since there is no up-to-date share register to justify their power to call the meeting. Without the share register, the shareholders have no stake in the company’s shareholding and decision-making (Adams 5). b) Insolvency issues Several insolvency issues face MyFriend even as techno-chics declare that the company’s working capital problems have not been fixed. It hence declares it will not provide funding support through that period, but would be prepared to inject further capital by way of a share issue. In acting this way, OurSpace complied with Sections 588V and 588W of the Corporations Act 2001, which “pierces the corporate veil” by permitting the holding company to be legally responsible for the insolvent trading of its subsidiary. Frank is depicted to blame for this and was liable for some penalty. Corporations Act 2001 s 588G creates a liability if a director is reasonably be aware that a company is on the verge of insolvency, and does nothing about it, he is liable to pay compensation. Black Night becomes a shareholder at MyFriend, after it deposited its subscription monies into an escrow account with its lawyers to be paid over to the company. The shareholders can seek legal remedy after they develop their shares register, without which their options are limited. This is specified by Corporations Act 2001 sections 9 (249A, 249B, 249L, 251A), which gives shareholders the right to pass a resolution through a meeting. Lastly, Ted has an interest in MyFriend based on the fact that Bob and Jane have appointed him as their proxy. Sections 249X of the Corporations Act 2001 states that a company member who is permitted to attend and vote at the meeting may appoint a person as his proxy to attend and vote on his behalf. Overall, a business lawyer can come to the conclusion that the shareholders, including Bob, Jane and the employees, have standing to apply for statutory injunctive relief as the conduct of the directors are seen as diminishing the value of their claim to MyFriend. This would stop the acquisition of the company by OurSpace. Further, they can file for damages. Section 1324 of the Corporations Act 2001 (Cth) suggests injunction as a remedy to the case, and grants the court the power to restrain a court from stopping a person from engaging in a particular way. Indeed, section 1324 stipulates that where any section of the Act has been violated, the court may award damages to the claimant. Works Cited Adams, Michael A. “Whether to protect or punish: legal consequences of contravening the Corporations Act.” Company Secretary (2004) pg 3 - 6 (Web) Retrieved from Byrne, Mark. “The duties and liabilities of persons below board level”. Canberra Law Review, 9 (2), (2006) 45-64. NSW Young Lawyers. “A Practitioner’s Guide to Corporate Law.” A Guide to Basic Procedures of Corporate Law for Young Lawyers. (2nd ed) (2007) p3, 27, 29 Freedman, Judith & Finch, Vanessa. “The limited liability partnership: pick and mix or mix-up?” Journal of Business Law.( 2002). Web. Retrieved Trachtman, Joel P. “International Regulatory Competition, Externalization, and Jurisdiction.” Harvard International Law Journal. 33(47). Web. 6-14 Sernia, Antoinette & Mei-Ling Barkoczy. “Directors Beware: Corporate Sanctions and Defences, a Matter for Review?” eLaw Journal: Murdoch University Electronic Journal of Law (2009) 16(1) 138-142 Read More