Financial Products: Legal Requirements for Offering Corporate Securities - Assignment Example

LAW OF FINANCIAL SERVICES STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Question 1 The fact in issue in the scenario is whether the actions proposed by David meet the requirements of the Corporations Act 2001(“The Act”). This is in relation to David’s proposal on ABC Ltd offering Eternal Life Ltd an option to acquire by issue of shares in ABC ltd for $1million. The law requires under section 710 of the Act that there needs to be disclosure of information to investors and professional advisers; who need to make an informed assessment of the matters set out in the prospectus, profile statement, short-term prospectus or the information statement. In the disclosure documents, the information given needs to be reasonable, that is the knowledge is relevant to the said offer, it reveals the offers issued, the rights of the parties and any liabilities that might attach to securities offer. A disclosure document also needs to disclose the assets and liabilities of the company, its financial position, performance, profits and losses, and the prospectus of the body that is to use the shares and debenture holders. Section 720 of the Act gives the procedural requirements for issuance of shares. Firstly, there needs to be consent from the issuing officers, the directors of the body, every person named in the document, and if the securities interest is managed investment scheme by a body. Additionally section 721 of the Act requires that any offer made in relation to issuance of shares, needs the disclosure documents for submission purposes. The ABC ltd needs to make a disclosure document to Eternal Life Ltd disclosing; the financial status of the company, the profits and losses, assets, the rights and liabilities of the company and any other information that is relevant for them to make the decision to purchase the shares. Question 2 The question relates to the legality of the action of publishing an advertisement on loan offers by ABC Ltd. This arises out of David’s proposal of placing and advertisement in the Sydney Moring Herald stating that the company would accept funds lodged upon loan with ABC Ltd in multiples of $5000. Certificates will be issued to investors certifying the total amount of any funds lodged on their behalf and company obligation to pay interest at 6% p.a. The application would be available upon request The Australian Securities and Investment Commission (ASIC) have the mandate to regulate the conduct of companies in relation to offering securities. Section 739 of the Act Section 739 of the Act allows ASIC to issue stop orders that is information in a disclosure document lodged be presented in a clear, concise, in a clear and effective manner. An order once issued requires that no offer, issues, sales or transfers of the securities be made while the order is in force. ASIC needs to hold a hearing, give reasonable opportunity to any interested people to make oral and written submissions to ASIC on the offers. ASIC can exempt or modify its actions under section 741 for those exempted under the provision. It may declare that it only applies person in provision omitted, modified or varied. In this case, ABC Ltd needs to lodge the loan offers to ASIC in order to determine whether it fits within the scope of actions exempted under the Act. If the loan offers, the pay interest of 6% p.a all fit within the scope of ASIC then it will get the approval for advertisement. However, the Act requires that before publication, the approval of ASIC is necessary. Question 3 The issues in contentions are whether David needs to publish the advertisement as it is or adding the caveat proposed by George. This is after David proposed to the Board of ABC Ltd to publish an advertisement that the Company ‘will offer acceptable rate of return to investor because of extraordinary sales are anticipated in the following year’. On the other hand, George wants to include as study report outcome that ‘car sales generally will go down by 20% the next year’. There is an obligation on all directors under sections 180, 181, and 182 of the Act that requires the directors of companies to exercise and discharge their powers and duties with due diligence and reasonable care. Further, in the performance of their duties, it requires performance in good faith, in the best interest of the corporations. In this circumstance, there is real likelihood of incurring loss if the 20% decline in car sales will happens, and this means a loss for the company. Section 743 of the Act states that a person is not authorized to advertise or publish a statement that directs or indirectly needs disclosure documents. Further, a prohibition on companies from publishing a document that directly or indirectly refers to offer or intended offer that is likely to induce people to apply for the securities. Such action is a strict liability offence. In this case, David proposal to publish the advertisement without the caveat means the investors will act in reliance to the document without having knowledge about the future of car dealership profitability. In any case, the ABC Ltd suffers a loss then it will have to shield investors from the loss by paying them for their losses. Since the company is aware of the status of car dealership business and this will not exempt them from liability. QUESTION 4 The question requires addressing the legal obligations under the Act advising Green and the Directors of A Ltd as to their legal obligations and potential liabilities. This is due to A Ltd proposing to offer a 40% shareholding in B ltd. A Ltd having sat on B Ltd Board knew they were suffering from declining fortunes while A Ltd claimed the sale of shares was informed by them pursuing other strategies. Section 710 of the Act requires that a company-issuing sale of shares needs to make full disclosure to all the investors and professional advisers would reasonably be interested in the acquisition of the shares. The proposed transfer of shares by A ltd fails to meet the disclosure requirements since it does not address the financial difficulties experienced by B ltd. Section 728 of the Act prohibits misstatement in or omission from disclosure documents. A person must not offer securities under a disclosure document that is misleading or deceptive statement in disclosure document. The A Ltd fails to disclose any reasonable circumstances for making the false disclosure. The conduct of A Ltd meets the threshold of false and deceptive conduct by the company’s directors. A director has a duty according to sections 180, 181, and 182 of the Act to act in utmost good faith, for the best interest of the company in performing his duties and obligations to the company. The failure to inform the potential investors about the financial position of the company implies that they failed in their duty to act in utmost good faith. The directors of A Ltd are in breach of their fiduciary duties to investors and shareholders since they acted in bad faith in disclosing false information as to why they were selling the shares. A Ltd is also in breach of the Act in relation to material disclosure in relation to share offers and sale. Question 5 The question requires addressing the legal obligations under the Act in relation to the issuance of the debenture notes. A Ltd issues debenture notes for a subscription for the next six months but instead Green negotiates with four individuals obliging the A Ltd to repay a principle of $100,000 together with interests. Mary offered a debenture note that stipulates an amendment from the previous subscription to influence clients. A director is a fiduciary for a company and that according to Pilmer v Duke Group Ltd (2001) 207 CLR 165 their conflict of interest need not influence them in making decisions. The conflict of interest in this case is that Green acts contrary to the expectations of the company and his duties and obligations under section 181, 182 and 183 of the Act. This likened to insider trading whereby benefits in the company are given to those who are willing to purchase the interests hence leaving out other interested investors from the plan. Section 736 of the Act prohibits hawking of securities that is either through an unsolicited meeting with another person or a telephone call to another person. The conduct of Green in negotiating the agreement with four investors, prior to communicating the opportunities to other potential investors constitutes a strict liability offence. The exception in this case arises if; the offer does not need a disclosure document because of sophisticated investors, professional investors, and licensed securities dealer. The publication and issuance of the debentures is in contravention of ASIC, that is all transactions relating to issuance of debentures, shares requires approval of ASIC and disclosure of information. Green acted in contravention of his director duties to act in utmost good faith. Offering Mary a different offer than that offered to other investors is an offence that of ‘hawking securities’ and A Ltd needs to reverese the transactions. Part D: Transactions on the Current Account The issue is to advise the bank on legal duties and obligations in relation to the withdrawals by Jenny Ford from her Trust account of her late father’s estate. This is because Jenney Ford withdrew $1,500 from the Trust account to finance pressing living expenses. The SIS Act 1993 at section 52 (2) requires that trustees need to act honestly, to exercise same care and diligence as an ordinary prudent person would in dealing with the property and to keep entity money and trustee money separate. Section 52 (2) as read together with sections 52 (5), section 53(2), section 52(8) of the SIS Act that directors need to carry out their duties in the covenants. The superannuation fund is a financial product under section 764A of the Act and that they are liable to obligations that lead to false or misleading statement, dishonest conducts, misleading and deceptive conduct that attracts civil liability under ASIC Act 2001 (Cth) A bank acts as a fiduciary in the trustee beneficiary relationship that is once Jane opened an account then the bank held the amount in trust. In many cases, the trustee investment allows a beneficial owner to retain the equitable interest, but the Banker will be a trustee for beneficiaries but not in the ordinary course of business. Further, the duties of a banker are to act in secrecy that is they are not to disclose material information outsiders in relation to transactions in the bank. In advising the Jane, the Bank needs to inform her that a bank cannot combine the customer’s account with an account, which the bank knows to be a trust account (Barclays Bank Ltd V Quistclose Investments Ltd [1970] AC 567). The banker owes a duty to the beneficiaries as stated in Foley V Hill and one needs to inform them about the status of their accounts. Read More