Share Market Unpredictability - Assignment Example

Student Name Student Number Course Name Course Code APA Referencing Style (Footnotes) Question 1 1(1) Share market unpredictability among other problems have mostly been as a result of none disclosure of debts by different companies. Whenever a person is purchasing shares from a certain entity, he or she needs to know a lot about the particular entity, particularly how it is fairing in the capital market. However, this does not mean that all entities give the correct details regarding how they are fairing in terms of debts1.This has created so much problems and it is an area that definitely needs to be addressed. Corporate governance frameworks without a doubt need to be strengthened and revised. If this does happen, then it means that there will be more accountability on the part of the directors. Debt disclosure is critical since it ensures that there are no cases where an entity may profit a corporate group as a whole for the corporation to undertake the debts of a "sister" company, regardless of whether the company giving the guarantee benefits or not2. This was illustrated in the Australian case of Mills v. Mills (1938) 60 CLR 1503. The directors had failed to disclose certain information to a purchaser of shares that in turn made him purchase them. He only realized of that there was some missing information after buying the shares. It was held that the company directors were liable for the non disclosure. Strengthening corporate governance frameworks will ensure that the directors observe due diligence, care and skill, which is their duty4. Similarly, strengthening corporate governance frameworks will ensure that there is shareholder protection. In the case of Sons of Gwalia v Margaretic; ING Investment Management v Margaretic (2007) 231 CLR 160, the High Court ruled that a shareholder chasing remedies for either false or misleading conduct and non-disclosure stirring up him to obtain shares in Sons of Gwalia Limited, was entitled to demonstrate in the administration of the corporation and attain the same status as the general creditors who are not secured5. This decision by the High Court would most definitely ensure that there is consumer protection to the shareholders since a company would no longer be in a position to mislead its customers6. Likewise, corporate debt disclosure goes hand in hand with the roles of auditors in an entity. Strengthening corporate governance frameworks will ensure that they are also held accountable incase he or she gives an inaccurate auditor’s reports. Their obtaining and giving of all information is imperative to the corporate debt disclosure7. 1(2) There should be more stringent regulations with disclosure requirements whereby public companies, larger private companies and guarantee companies ought to publish more complete directors’ reports. There should be either half yearly or annual reports detailing each and every coin a company owes others or is owned. Consequently, these reports should be made easily available so that any individual who is willing to purchase shares of a certain company gets well equipped with all the information, in terms of financial power, that concerns the company. A closer look on this decision reached in the case of Sons of Gwalia v Margaretic; ING Investment Management v Margaretic (2007) 231 CLR 160 will show that a person who has the intention of being part of a company should be given all the details regarding the company8. Even though the decision was reversed by an Act of Parliament, the case is still considered as landmark and there has been so much debate as to whether it was supposed to be reversed. Providing information ensures that the shareholder’s rights are more protected. In addition to this, there ought to be more efficient rules to deal with issues of conflicts of interest. Another more stringent regulation with disclosure requirements would be to ensure that there is accurateness and completeness of companies’ documents at the Companies Registry. All companies should have their accurate documents where they can be accessed for verification by the general public9. Question 2 In order to achieve consistency in law, there should be a particular law, statute or precedent that ought to be adopted. It ensures that everyone faces the law gets a fair share as others who are in a similar situation. The statutory business judgement rule generally states that a director’s actions should be weighed on a business scale where if their actions were business oriented in that it profited the company, the director will not be held to have breached his or her fiduciary duties. Under the Act, business judgment basically means any resolution to either undertake or not to undertake a certain action in regard to an issue that is significant to the business function of the company10. In the case of Hutton v West Cork Railway Co (1883) 23 Ch D 654, West Cork Railway Company filed a suit against its director Hutton, for breach of fiduciary duties. He had made a transaction without the consent of the company’s shareholders. It was held that he had breached his fiduciary duty for paying out money without due knowledge of the company11. Normally, a director might conduct a certain transaction that he or she believes was the best at that situation one that might result in big profits for the company. Similarly, a director might conduct a transaction in a manner that may be regarded as bona fide yet illogical. These are two different situations that are actually conflicting. When a director is reaching at a decision, he or she must do so in good faith and exercise due diligence. This is what was decided in the Australian case of Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483(at 49312) by the High Court. The judge was generally trying to mirror out that if a director exercised good faith and at the same time did not use his powers for irrelevant purposes, then the statutory business judgment rule that currently exists under s180 (2) of the Corporations Act 2001 protected him from any liability13. The directors have been vested in them the right and duty of make a decision where the organisation’s interests lie. Therefore, a very wide ceiling of considerations has to be done to determine whether statutory business judgment rule will free them of any wrong doing14. These considerations are outlined in the Act under section 180(2) Corporations Act 2001. Basically, regardless of the fact that consistency and precedent are very important aspects of the law, equity must also come into play so as to ensure that one does not get punished for an unknown offence that he or she might have allegedly committed. The director may have made the decision in good faith and for a suitable reason but still find himself or herself liable if a general defence other than the statutory business judgment rule. Similarly, if he makes a decision and does not have any self interest in the decision, then there should be no liability. A decision that is being made ought to be well informed in that the company officer or director should enlighten himself or herself about the issue that is under his or her judgment. Having done that, he or she will be in a good position to tell whether it is appropriate or not15. In addition to these, the officer or director who logically trusts that the decision is in the best interests of the company will have satisfied this rule. This was observed by Austin J in the case of ASIC v Rich (2009) 75 ACSR 1at [7253] where his general observation was that the business judgment rule tries to weigh whether the company officer’s or the director’s actions resulted in violation of the general law duty16. It is also critical to note that it is the company officer or director who is supposed to prove the contents of s180 (2) of the Corporations Act 2001. Therefore, if he or she successfully proves them, then there will be no liability. This is what the rule serves to protect. It is able to critically analyse the conduct of the director or the company officer so that it is that particular conduct which will eventually judge him or her since it must be in compliance with the legal duties and responsibilities17. Question 3 A director of a company has fiduciary duties that are owed to the company. The constitution of the company normally outlines how it is supposed to be run by the directors among other heads. Their duties are equivalent to duties owed by agents to principals or by trustees to beneficiaries. The general duties that a director owes a company can be summarized as; A duty to the company and not to the individual shareholders, the employees or creditors, ensuring that his or her loyalty is towards the company in addition to ensuring that there are no conflicting interests whatsoever, they should ensure that they exercise due diligence, care and skill in their actions towards the company, they should also ensure that they act in good faith at all times in order to promote the success of the corporation. Similarly, a director has the duty not to use his or powers for an inappropriate reason whatsoever18. In the case of Regal (Hastings) Ltd v Gulliver (1942) All ER 378 the House of Lords decided that the actions by the directors was so connected to the day to day dealings of the company so that they were basically using their capacity as directors and seizing an opportunity. However, they added that the actions by the directors resulted to self gains or advantage19. Consequently the directors were ordered to give the profits that had been acquired from actions to the shareholders. It is critical that one gets to analyse the statutory duties of a director as provided for under the Corporations Act 2001: Section 181generally brings out the duty to act in the best interests of the company, for proper purpose, all of which should be done in good faith20. In the Regal (Hastings) Ltd v Gulliver case, the directors were presumed to have not gained totally knowledgeable consent from the shareholders. However, one must equally analyse the actions of the directors in order to determine whether they went against Section 181 of the Corporations Act 2001. Regal Limited had a cinema in Hastings. The company went ahead to take out leases on other two, through a new subsidiary, so that the whole package could be a more attractive sale. Four directors put £500 after the company had put in £2,000, so that it would amount to £5,000 that the landlord had suggested. Later, they sold the business that resulted in a profit of nearly £3 for each share. The fact that they had not consulted the shareholders is what held them liable21. But in doing so, did they go against Sections 182, 183 or 184? Section 182 provides for a duty not to misuse their position to gain advantage. The directors could be said to have misused their position since they did not involve the shareholders. Similarly, they used their own money and position to make profits that would without a doubt enriches them since they would take the profits in the ratio of their contributions. Similarly, Section 183 provides for the duty not to misuse information to gain advantage. The directors certainly did gain advantage due to the knowledge they had on how this whole transaction would benefit them. They knew that they would get something out of it which resulted to a conflict of interest as was held in the case of Aberdeen Ry v. Blaikie 1 Macq HL 46122. However, they could not be held to have breached section 184 that provides that the directors who contravene sections 181, 182 and 183 for gain and where the conduct is reckless or intentionally dishonest will face a criminal penalty. They were not reckless in their actions nor were they dishonest since they all came up with a decision they deemed suitable in addition to the fact that they involved the company solicitor who is supposed to guide them on legal matters The bottom line is that the directors sized up an opportunity that came up to benefit the company and also themselves. This is regardless of the fact that they could have been advised to do so by the company solicitor. The directors ought not, devoid of the well-versed consent of the company, use for their own profit the company's assets, opportunities, or information23. Question 4 In the case of Sons of Gwalia v Margaretic; ING Investment Management v Margaretic (2007) 231 CLR 160, which is also referred to as the Sons of Gwalia, the High Court ruled that a shareholder chasing remedies for either false or misleading conduct and non-disclosure inducing him to purchase shares in Sons of Gwalia Limited, was at liberty to demonstrate in the administration of the corporation and attain the same status as the general creditors who are not secured. A closer examination on this decision will show that a person who has the intention of being part of a company should be given all the details regarding the company. It should be the duty of the company directors of company officers to give the correct information to anyone intending to purchase shares in that organisation. Holding on to some information by the company or giving false information means that there is something sinister that the company might be holding onto. It means that the company is trying to deceive the purchaser in order to gain undue advantage. In agreement with the decision, I would say that the decision was meant to punish those companies that did so instead of declaring the contract void. This decision by the High Court would most definitely ensure that there is consumer protection to the shareholders since a company would no longer be in a position to mislead its customers24. However, this judgment has been subjected to so much debate including the parliament of Australia that eventually led to the birth of the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth), also known as the Sons of Gwalia Act, that amended the Corporations Act 2001 (Cth), previously the Corporations Act25. The Sons of Gwalia Act brought about three significant modifications to the Corporations Act: Under section 247E of the Sons of Gwalia Act a person will not barred from lodging a claim by the mere fact of only holding, previously held or subscribing for shares in the corporation26. Similarly, section563A of Sons of Gwalia Act states that a claim which "arises from a person buying, holding, selling or otherwise dealing in shares in the company [is] postponed [such that only once] all other claims made against the company are satisfied [can the] subordinate claim [be satisfied]"27.  The effect of this change is that in general there will be no finances offered for allocation to shareholder creditors of an insolvent corporation (Sons of Gwalia Act 2010). This without a doubt is not favorable in terms of protection of rights of the shareholders as the Corporations Act 2001 (Cth). The last amendment brought about by the Sons of Gwalia Act 2010 is the introduction of a new section, which is section 600H. This new section provides that an individual who had a claim deferred under section 563A has the right to be given copies of notices sent to the creditors. But this may only happen if the request is made in writing. Equally, they can only vote if the court so allows. It is very hard to tell the situations which will evoke the court into allowing shareholder creditors to vote28. These amendments have just made things stricter since there may be scenarios of a small group of creditors holding meetings and at the same time, being the ones to vote, hence exercising momentous control over the future of the insolvent corporation. Again, the future of all the small shareholders will end up being subordinated29.  The amendments brought about by the Sons of Gwalia Act 2010 may also bring about confusion of some sort. There has been the inclusion of claims that arise as a result of dealings in shares in the class of subordination. The effect that this has is that it will give a leeway for investors who have acquired other securities to lodge claims. The problem arises where there are claims born out of transactions that do have specific securities (Sons of Gwalia Act 2010)30. It is however imperative to note that the ability of the shareholders to sue the company for damages for misrepresentation has not been taken away from them but have been subordinated. This does not mean that the Sons of Gwalia Act 2010 is any better, it is stricter than and not as preferable as the Corporations Act 2001. References Cases Mills v. Mills (1938) 60 CLR 150 Sons of Gwalia v Margaretic; ING Investment Management v Margaretic (2007) 231 CLR 160 Hutton v West Cork Railway Co (1883) 23 Ch D 654 Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483(at 493) ASIC v Rich (2009) 75 ACSR 1at [7253] Regal (Hastings) Ltd v Gulliver [1942] All ER 378 Aberdeen Ry v. Blaikie 1 Macq HL 461 Statutes Corporations Act 2001(Cth) Corporations Act 2001: Section 180 Corporations Act 2001: Section 181 Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) 247E of the Sons of Gwalia Act Section563A of Sons of Gwalia Act Books Byrne Mark (2006). Company Law & Governance Update. Liverpool: University of Liverpool Press. Charles Allen (2013). Australian Companies Regulations. North Melbourne: Oxford University Press. Gillies P. (2008).Concise Contract Law. Sydney: Federation Press. MacDonald E. (2007). The Law of Contract. London: Oxford University Press. Matthew Hooper 2001. Commercial Disputes. London: OUP Simon Pitt. (2006). Directors’ Duties. London: Oxford University Press. Wiltord, C. (2009). Contract Law. North Melbourne: Oxford University Press. Read More