Company and Securities Law in Australia - Article Example

Company and Securities Law Name Course Professor Date Table of Contents Executive Summary …………………………………………………………....03 Overview of Australian Business Environment…………………………………………………………………….03 Introduction ……………………………………….……………………………04 Issues Faced by Companies……………………………….……………………05 Issues Faced by Directors…………...………………………………………….06 Issues Faced by Boards…………………………………………………………07 Case Study: Facts of the Case…………………….…………………………….08 Discussion…………………………………………….……………………….....09 Duties of Directors……………………………………….………………………09 Advice to the Directors……………….................................................................09 Consequences of Directors Breach of Duties………………………………….11 Comparison of Case Studies……………………………………………………11 Conclusion ………………………………………………………………………12 Recommendations………………………………………………………………12 References………………………………………………………………………..14 Company and Securities Law Executive Summary Australian business environment is attractive and friendly to investors. The market population consist of high consumers of locally produced goods and services. Indeed, most of the multinational corporations first introduce their ideas, products or services in the country before they can expand them to Asia and international markets. Moreover, transparency and a well regulated environment for doing business attract investors to choose Australia as their first destination of investment. The directors and boards of companies are entrusted with running of the business but are face by various issues such as increase regulation and competition. In this report, issues of competition, regulation, decline in growth of Chinese economy and the broad mandate of boards are discussed extensively. Production of quality products and services can be used by companies as one way of dealing with competition. Analysis of the case study reveals that the directors breach their duties under the Corporations Act 2001 and therefore liable to criminal offence. Overview of Business Environment in Australia Australia is a developed and stable nation having diverse and competitive market. This kind of market encourages imports and exports trade as well as foreign investments. The country is positioned in such a way that it takes advantage of ever increasing trade and investment opportunities present in the region. It achieves this because of its strong trade, economic and political links it has on the Asia-Pacific region. The long and continued healthy economic and political ties that Australia has with Middle East, Europe, Africa and Americas further boosts its economy. Australia mainly depends on exportation of minerals, manufactured goods, and energy products among others. Introduction A company that has been registered in Australia can carry out its business throughout the country. Before it can be registered, the persons starting the company should decide its structure, company name, how it will be operated as well as an understanding of the legal obligations. After all the formalities of formation of a company have been undertaken including choosing of directors, it can now carry out its mandated activities. Fulfilment of customers needs becomes a priority for the company as they are integral in achieving its goals. In any country, the main challenge of a company is satisfying the needs of its stakeholders. This can be difficult to achieve as new business models emerges everyday that challenges the business methods and information technology architectures already existing. The evolution of new business models needs new information technology infrastructure to support these models (Williams, Mary-Anne, and Elliot 93). Traditional way of doing business is inflexible hence companies need to institute e-business models in order to be competitive and up to date. Interaction of companies with its customers, partners and any party interested in the company is a must. E-business can be a platform where this interaction can take place. It is important to note that the main benefit of e-business is its potential of transforming traditional business practice (Williams, Mary-Anne, and Elliot 93). Innovative solutions to company problems are needed at the moment as uncertainty in economy and stiff competition. This report discusses the issues faced by companies, directors and boards in Australia. It also includes analysis of a case study and an advice to directors whether they have breach their directors duties. Issues Faced by Companies Companies have been facing various challenges and issues since the 1930s great depression that severely affected many of the world’s economies. However, the challenges faced by Australian companies today are greater than in those days. Competition is becoming stiff each day and dynamics of business environment are fast changing. A company have to deal with multiple competitors in Australia and also internationally. This is due to globalization that has increased competition (Stark 15). Indeed, the companies have to deal with myriad of challenges and opportunities offered by global competitors and the global market. Companies are continually seeking innovative ways in order to have a competitive advantage. Businesses that do not innovate are left behind hence having the greatest chance of failing because of their uncompetitive nature. In this case, companies are finding it difficult to set aside some money for innovation purposes in times of difficult economic situations. Moreover, finding individuals that have the greatest innovative minds is a problem as they are either few or demands large pay packages. The situation is aggravated further by the fact that the Australian economy has been shaky in the past few years due to factors such as 2013 election and problems of Chinese economy. In 2013, the economy was slowed down by the election. Business community had to wait until election time was over before they can invest and employ personnel needed in their organizations. The economy was also slowed down by the problems of financial system in China that persisted for some time. Overall, a slow economic growth in China affects Australian companies to a large extent. The country mainly exports its products and services to Asian countries as a way of earning its revenues. Chinese economy has not been growing at the expected rates in the recent times. Export prices by companies in the country have been experiencing declines for quite some time now due to problems of economic growth in China. Companies are therefore forced to find alternative ways of filling the gap created by a fall in export prices or seek alternative markets altogether. Issues Faced by Company Directors The Australian legal and regulatory setting continues to experience developments. Responses to various challenges have been conditioned by these developments. These have also widened the gap between traditional understandings of the directors’ role as the companies’ custodians of its strategic direction (Du Plessis, Hargovan, and Bagaric 67). On the other hand, there is increasing risk pertaining to responsibilities associated with compliance-based responsibilities of the directors. In this context, directors of Australian companies are not sure whether the current role of director still possesses the potentiality of some level of entrepreneurship and creativity that this role was associated with in the past. In essence, the directors duty is to act in a way that the company best interests are achieved at all time (Du Plessis, Hargovan, and Bagaric 67). This should be carried out by them owing to the position they have been appointed to represent a separate legal entity. In the past few years, the directors’ attention has been to deal with regulatory issues. Regulatory reforms have been undertaken in the recent past which has consequently increased responsibility and the risk of directors’ personal liability. Most of these imposed responsibilities were previously apparent responsibility of the management. Although the Federal Government have recently attempted to address concerns pertaining to directors’ role and extent of their personal liability, red tape as well as excessive regulation continues to be an area of major concern for directors (Haines, Sutton , and Platania-Phung 435) . This has frustrated directors and a clear concern that the proposed reforms should have an appropriate cost benefit analysis before they can be adopted and implemented is continually voiced. The government always has certain motives when carrying out regulation reforms in a certain sector of the economy. For instance, the government may regulate was a way of safeguarding the interests of the regulated sector (Baldwin, Cave, and Lodge 15). Company directors may not see regulatory reforms as being beneficial to them but they are rather implemented to curtail their operations. In 2012, occupational health and safety laws were harmonised. These laws imposed on directors new obligations that included exercising due diligence in order to have surety of compliance. Laws and regulations such as these are becoming a major issue for directors as the number of compliance laws is increasingly growing which may be a problem in execution of their duties. Issues Faced by Boards The board of directors of a company is one of the most important bodies bestowed with making decisions that improves the company as a whole. Directors are at the top of the governance structure with responsibility of leading the company. However, boards oversee all the functions of a company. Shareholders hold the board accountable and their responsibility is to the relevant stakeholders (Chan and Ho 279). Due to this, effectiveness of communications to and from stakeholders and shareholders need to be ensured by the board. In case there are external problems affecting the boards, confidence in boardrooms are significantly impacted. Australian boards have to deal with issues of unfavourable economic conditions in their bid to steer their companies to prosperity. The laws and regulations governing the workplace are increasing and the boards are faced with the challenge of ensuring that their companies comply with all of them. Today, boards are in a position that is very challenging. The mandate of boards is broad meaning that they must be acquainted with the increase in various sources of information. Hence, they should adopt strategic responses in fulfilment of their mandate and in determining when consultation of third-party experts in a given circumstance is needed. The changes in the global economy are of significant importance to the boards. Global economies are changing at a faster pace and boards are strained in keeping up with the circumstances of aligning their companies to deal with the realities. There is also the issue of regulatory uncertainty that the boards needs to address. Regulation of companies in Australia is somehow unpredictable hence boards should be prepared of uncertainties to the regulatory framework. Case Study: Facts of the Case Chaser limited is led by four directors namely: Anthony, Ben, Catherine and Daniel. Anthony invites his old friend Wayne to talk in the next board meeting about the prospect of the company investing in tidal energy. Wayne convinced the board members about carrying out an investment project in tidal energy and they decided to invest $20 million. The tidal energy business was unsuccessful three months later because of unsuitability of Australian waters for tidal energy. It was later reveal that Wayne had no expertise in the field of tidal energy and held an insignificant position in his company. Furthermore, Anthony has majority of shares at Westpool Pty ltd, a company that Wayne works for. Discussion In order to fully advise the directors of Chaser limited whether they have breached their directors’ duties under the Corporations Act 2001 (Cth) and the general law, it is important to understand the duties of company directors. Duties of Directors In Australia, the duties of directors are covered under the Corporations Act of 2001. In general, the director is required to undertake his or her duties with care and diligence and with good faith (Australia CCH Ltd 221). Australian Securities and Investments Commission (ASIC) ensure that directors comply with all the corporations Act. The director has some key powers, responsibilities and duties set out by Corporations Act 2001. Under the provision to act with due diligence and care, directors are required to exercise their powers as well as carry out their duties with degree of care and diligence of that of a reasonable person (Harris 2008). Moreover, discharge of duties should also be undertaken in good faith and in the interest of the company for a proper purpose. Directors are required to make business judgment. In doing this, they are expected to make them in good faith for purposes of a proper cause. Additionally, a director should not be having any material personal interest as far as the subject matter of the judgement is concern (Australia CCH Ltd 221). A rational director is the one that believes that the corporation best interests are achieved in a given judgement unless the belief cannot be hold by any reasonable person in their position. Section (182) of the Corporations Act prohibits the use of directors’ position in gaining an individual advantage or for causing detriment to the company (Latimer 696). Additionally, a director should not use information on basis of their role in the company in gaining an advantage either to themselves or someone else. Advice to the Directors The directors of Chaser Limited may have breach their duties under the corporations Act 2001 by undertaking to invest in tidal energy without deliberating further on its viability. Directors are charged with the responsibility of ensuring the affairs of the company are run in such a manner that the company realise its potential. Furthermore, they are required to ensure that no harm happens to the company-whether foreseeable or not. Under section 184 (1) of the Corporation Act, a director commits an offence if he or she is reckless (Australia CCH Ltd 224). The directors of Chaser limited were reckless in their decisions as they did not give much thought to Wayne’s idea but they rather believe him because he was convincing. In this case, the directors breach their duties and are therefore criminally responsible for their action as the company suffered great loss. The competition in the wine industry has necessitated companies to diversify. The directors of Chaser limited saw the opportunity of generating additional revenues for the company by investing in tidal energy. Although the investment idea was for a proper purpose, they breach their directors’ duties of discharging their duties with care and diligence. They made hasty decision without first counterchecking the facts. First, the directors should have find out what position Wayne holds at Westpool Pty ltd. Secondly, they should have find out if the company is capable of supplying tidal stream generators and its track record. Thirdly, directors need ought to have assessed the viability of Australian waters to produce tidal power but instead they were overwhelmed by the prospect of becoming pioneers in production of tidal power in the country. In this case, expert advice on viability of tidal energy in Australia was required before Chaser ltd directors made their decision. The directors breach provision 180(2) of the corporation Act that demands directors to be informed as far as subject matter of the judgement is concern until they have a believe that it is reasonably appropriate (Latimer 698). The judgement they made was obviously not in the best interests of the company. Consequences of Directors Breach of Duties The directors of Chaser ltd breach their directors duties and therefore responsible for their actions. Specifically, Anthony breach section 182 (1) of corporations Act that stipulates that a director should not use his position in an improper manner for gaining an advantage for themselves since Anthony is the majority shareholder of Westpool Pty ltd. The directors owe their duties to the company and the company is proper plaintiff in a situation where the directors breach any of their duties (Du Plessis, Hargovan, and Bagaric 281). The directors of Chaser Limited breach their duties hence an individual can bring a derivative action for the benefit of the company and not an individual. Comparison with other Case Studies The case for Chaser Limited is similar to some other case studies. The case of ASIC v Rich (2009) NSWSC involves One. Tel Ltd (One. Tel) directors. They were sued by ASIC for breach of their statutory duty of care and diligence which is contravention of 180(1) of the Act (Du Plessis, Hargovan, and Bagaric 227). This was as a result of collapse of One.Tel with its subsidiaries. The directors were accused of not disclosing the company’s true financial position to the board when they knew it. In this case, they breach their directors’ duties of diligence and care. ASIC v Vines pertains to a case filed by AISC on GIO Insurance limited for the alleged contravention of statutory duties by the company executives. It was ruled that the directors breach their duties of care and diligence for failure to properly inform its auditors as well as due diligence committee. The two cases are similar to the case of Chaser ltd in that the directors neglect their duty of due diligence and care. In this case, Chaser ltd directors may be sued by AISC or any individual shareholder for breach of their duties and non compliance of the Corporations Act. Conclusion For many years, the directors and boards of companies in Australia have to deal with various commercial and business challenges that continue to reshape their perception and the real roles they play. In general, this include the increasingly difficult conditions in the economy and business in the country and internationally. These have lowered down the confidence of the business enterprises which has been slowly fully recovering from the global financial crisis of 2008. Companies need also to tackle the pressure originating from burgeoning Asian economies that has challenged the businesses that are mainly domestically oriented. Specifically, the growing influence of China in the world economy means that the Australian companies need to re-orient to successfully deal with the current market realities. In order to realise their potential and prosperity in the future, directors and boards should develop strategies of dealing with the current issues. Recommendations The current issues faced by companies, directors and boards in Australia can be mitigated taking various actions and adopting of various strategies. Companies should seek innovative ideas in order to deal with competition. This will ensure that customers are satisfied. The fall in export prices can be dealt with by companies producing products and services of the greatest quality. This will give them competitive advantage and can be also a strategy where new markets can be found. The directors and boards should ensure that there is always transparency in conducting the company affairs. This also helps in building confidence at the board meetings given the changing dynamics of the boards. The issue of increased regulation affecting the performance of directors and the boards has a solution. Directors and boards should ensure that they are always informed about the developments of regulatory framework. In this way, they are able to anticipate the changes to regulatory framework and hence prepare adequately. References Australia CCH Ltd. Australian Corporations & Securities Legislation 2011. North Ryde, N.S.W: CCH Australia, 2011. Print. Baldwin, Robert, Martin Cave, and Martin Lodge. Understanding Regulation: Theory, Strategy, and Practice. 2nd edn. Oxford: Oxford University Press, 2011. Print. Du Plessis, Jean, Anil Hargovan, and Martin Lodge. Principles of Contemporary Governance. Cambridge: Cambridge University Press, 2010. Print. Haines, Fiona, Adam Sutton, and Chris Platania-Phung. "It’s all about risk, isn’t it? Science, politics, public opinion and regulatory reform." Flinders Journal of Law Reform 10 (2008): Web. 25 January. 2015. Harris, Jason. "Relief from Liability for Company Directors: Recent Developments and Their Implications." University of Western Sydney Law Review 12.1(2008): Web. 24 May 2015. Latimer, Paul S. Australian Business Law 2012. 31st edn. North Ryde, N.S.W: CCH Australia, 2011. Print. Stark, John. Global Product: Strategy, Product Lifecycle Management and the Billion Customer Question. London: Springer, 2007. Print. Williams, Mary-Anne, and Steve Elliot. “An Evaluation of Intelligent Agent Based Innovation in the Wholesale Financial Services Industry.” Seeking Success in E-Business: A Multidisciplinary Approach. Eds. Andersen, Kim V et al.  Boston: Kluwer Academic Publishers, 2003.91-106. Print. Read More