Legal Requirements for Offering Corporate Securities - Assignment Example

LEGAL REQUIREMENTS FOR OFFERING CORPORATE SECURITIES Question 1: This case presents proposals suggested by David. To adopt these proposals, Corporations Act 2001 sets requirement that ABC Ltd should consider when making such decisions. Before embarking on the requirements of Corporations Act 2001, it needs to be established that ABC Ltd is governed by provisions of the Corporations Act 2001 that apply to ABC Ltd as replaceable rules (see s135(1). To begin with, Section 710 of the Act sets out prospectus content as a general disclosure test. Prospectus being ABC Ltd, is required under this Section to have the necessary information that Eternal Life Ltd and their associated professional advisers need to make judgment on whether to acquire, by way of issue, shares in ABC. For instance, the table included under the same section requires that for ABC Ltd to offer to issue shares to Eternal Life Ltd, it needs to disclose information such as liabilities, assets, financial positions and profit and losses. Secondly, this case deals with issue offers (which are shares) therefore Section 720 of the Act requires consent for such lodgment. Actually, consent for such lodgments must be accompanied by relevant disclosure documents as enshrined under Section 721. This document will not also go without notification from either party regarding any deficiencies as contained under section 730. The second issue that needs clarification is whether Eternal Life Ltd should be a long term financing partner of ABC Ltd. To begin with, s 766A qualifies Eternal Life Ltd as a financial service provider. Having established this, Section 1012A requires that ABC Ltd be given product disclosure statements so that both parties can be aware of particular financial plan as suggested by Eternal Life Ltd. In addition, ABC Ltd has been offered opportunity to stabilize its share register. However, Section 1013E requires that Eternal Life Ltd include other relevant information that may influence the decision for acquiring the offer. Lastly, Section1013F-L requires Eternal Life Ltd to disclose superannuation or interests associated with such packages. Question 2: ABC Ltd led by David and Eternal Life Ltd ought to understand that under Section 734 of the Corporations Act, there are restrictions on what David needs to advertise and or publicise. In this case, David advertise that ABC Ltd would accept funds lodged upon loan with ABC Ltd, in multiples of $5,000'. To elaborate on this, David is not allowed to advertise or publicise for offers especially when such is covered by the exception for 20 issues within 12 months. Secondly, David is actually advertising an offer of securities that may require a disclosure document---Section 734 (1) prohibits such proposals. On the other hand, subsection (2) may not apply to David’s case if the advertisement has been authorized by subsection (4), (5), (6) or (7). Bringing subsection (2) in the picture, it also needs to recognized that David could disseminate or publicise a disclosure document provided the document has been lodged with Australian Securities and Investments Commission (ASIC). In so doing, he will not have contravened subsection (2). In as much, this will not be the case if an order as enshrined in Section 739 is in operational with regard to the offer made. With regard to Section 739, ASIC has powers to stop orders that David would have made if there were elements that had not satisfied ASIC. Integrating Section 734 and 739, Section 739 will only be considered if ASIC is contended that David did not, in his disclosure document lodged with ASIC, provided information that were worded and presented in concise, clear and effective manner (more details available under Section 715 A). Section 741 gives ASIC powers to exempt and modify the disclosure document lodged with ASIC. However, such modifications and exemptions may come under various conditions as stated under subsections (2), 3, (4) and (5). Question 3: The first matter of this case before advising the directors is to ascertain whether they meet provisions of Section 9 and therefore recognized as directors. Having established this, these directors are entitled by section 180 and in part, section 181 of the Corporations Act to exercise their powers and discharge duties accorded to them with care and diligence and in doing so, ensure the duty is done in good faith and best interest of ABC Ltd. Current financial position puts ABC Ltd as solvent and if proposals made by the directors renders it insolvent then they will be liable under section 180 and in part, section 181. Therefore whoever will establish clear defense may be able to avoid personal liability under civil penalty provisions. They may escape liability if they show; a. Reasonable steps were taken to avoid incurring in the debt Assuming that David goes ahead with his plan and therefore renders the company insolvent, George may argue that he took reasonable steps to avoid incursion of debt by first, warning David that a recent car industry study showed 20% decline in demands. Secondly, he argued that the step should be included in the advertisement. However, if George adopts this defense mechanism then the aspect of “reasonable steps” will still be established by the court. b. Reasonable grounds to suspect that ABC Ltd was solvent In this case, George and other directors have relevant information to all company’s information regarding records, and are having reasonable grounds that before adopting David’s proposal, ABC Ltd is solvent. To this regard, the court will still view the degree of strictness vis-à-vis level of awareness. In the event the proposal made by David makes the company insolvent then David and other directors will be liable for the losses incurred since the trading undertaken by David may be termed as insolvent. However, Section 1318 and Section 1317S may exempt them under specific conditions. Question 4: A and B limited have the statutory duties, under the provisions of Corporations Act 2001 and an equitable fiduciary duties to act in the best interest of the company and potential investors. Beginning with the decision by A Ltd to offer for sale its major 40% shareholdings in B Ltd, Section 708 clarifies offers that do not need disclosure. In this case, the advertisement states simply that A Ltd has decided to pursue other investment strategies. If this action is indeed small scale offering then it does not require disclosure to investors especially if none of its shares on offer results in a breach of the 20 investors ceiling. However, A Ltd must note that Section 708 does not have relevance when dealing with offer for sale to which sale accumulating to indirect issue applies (available under subsection 707(3)). Furthermore, A Ltd must note that under subsection 727 (4), it is unlawful to make such offer without citing or putting disclosure to investors. This is the reason why Green, a non-executive director of A Ltd is worried. In addition, the concept of professional investors ought to be considered. In the event that the 40% shares are offered to professional investors then a person covered by section 9 needs not disclosures. In the breach on the above sections, then section 739 still gives ASIC powers to reverse decisions made by A Ltd. The other issue raised is that decision was made because they were aware that B Ltd would shortly sell off its profitable grocery business and that B Ltd has been suffering declining fortunes for some time. To this regard, any decision made by A Ltd will comply with section 180 and in part, section 181 thus saving A Ltd from any possible insolvency. In the event, Green need to first establish the kind of investors targeted as there are shares that do not need disclosures (professional investors). In addition, if other directors offered shares and such contravened the sections above, civil penalty provisions may be launched. Question 5: In this transaction, it has been established that A Ltd has planned to issue four new debentures for subscription and intending to take this for a period of over six months. Further to this information, A Ltd has not disclosed to investors with regard to the offer. Going by section 707 of the corporations Act, there are only particular subscriptions that require disclosures. From the first transaction, the information given cited that A Ltd shares have not been quoted in the stock exchange therefore making subsection 2 to be more relevant regarding this case. That is, the four debentures for subscription need disclosures only if the debentures are not quoted and in the event they are quoted they have not been offered for subscription or sale in the ordinary course of trading in the required or relevant financial market. Unless the type of investor is established by A Ltd, this offer, under Section 706 does not require them to give disclosures. However, section 708 and in some instances 708 AA may give different conditions that both the investor and the Company should consider. If investors and the Company agrees that there are no disclosures required, ASIC may determine if it is satisfied that in the last 12 months the Company had not contravened some of the provisions related with none disclosures. Regarding Mary, as one of the investors and stockbroker, Section 721 regulates what should be done between the company and Mary. Setting the issue, the debenture note has been amended so as the offer can be accepted. What needs to be explained to A Ltd is that Section 741 only gives ASIC powers to exempt and modify the disclosure document not them. In addition to this, all offers made by A Ltd must be accompanied by the disclosure document as stipulated under Section 721. TRANSACTIONS ON THE CURRENT ACCOUNT Question 3 Basing on statutory regulations, the bank in question is the agent of Jenny Ford and thus obligated to pay cheques. However, there are some regulations that may stop such rights. To begin with, Jenny Ford runs a trustee account meaning that the bank is acting as an authorised custodian thus holding funds for managing late Harry Ford’s Estate. However, the bank ought to understand that it is its legal duties to combine accounts. To this regard, Jane Ford seems to have had or she still has an account with the bank prior to opening Jenny Ford -Trustee for the Estate Late Harry Ford. Therefore basing on legal preceding that involved Garnett v M’Kewan (1872), banks have the right to treat all Jane’s account as a single sum without notifying her for certain purposes. Further to this, while this is its right, it is not obligated and therefore has no legal duties to honour the last cheque drawn by Jane. The bank also needs to note that the right to combine the accounts owned by Jane is further complicated owing to the fact that the two accounts are different. As noted in this case and with regard to Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd case, Jane was very specific about the purpose of Jenny Ford -Trustee for the Estate Late Harry Ford account there she is limited to the use of the account (as a trustee account). In addition to this, Jenny Ford -Trustee for the Estate Late Harry Ford is a trustee account therefore not an account held by Jane on single capacity and one repercussion of trustee accounts is that the bank has no right to combine the account or make attempts to honour cheques that contravene the agreed purpose of the account in question. Before honouring the cheque, Bank manager should note that Jane holds this account and she is bound by law to take care of the account for the benefit of her late father therefore drawing cheque to pay her personal expenses contravenes relevant laws. . Read More