Foundations of Company and Commercial Law - Assignment Example

Name: Course: Professor: Date: Question 1 Discuss any liability of the directors of Alexa Ltd in relation to these events. What are the consequences, if any, of a breach of the Corporations Act? Refer to relevant legislative provisions and case law in your answer. Directors are the people responsible for overseeing the activities of the organization are ran in the right way. In short, they represent the shareholders interest in the organization. The directors among other things they are responsible for the preparation of financial statements and reports pertaining to the business. But since they have delegating powers, they assign these functions to their juniors such as the accountants and the finance officer. Since they are the people who present the financial statements to the shareholders alongside the director’s report showing that the statements are prepared according to the standards set forth, the financial statement must go through various people to ensure that they are correct and true (Ford 2012). The accountant must first collect relevant information that is necessary to prepare the financial statements of the company such as the income statements and the statement of financial position. It is required that they follow some standards such as the International Financial Reporting Standards (IFRS) in the preparation of the statements so that there is formality and that the reports can be used by other organization as well. After the preparation of the annual reports, they are issued to the finance manager who analyzes them to see if the statements are prepared according to the set standards of the organization. The finance manager can identify errors and recommend the changes to the accountants. If he approves that the statements are correct, there is an annual review of the statements by an independent auditor appointed by the directors. The work of the auditors is to inspect the financial statements in order to issue a report as to the state of the statement. He inspects the financial reports so as to certify they portray a true and fair view of the status of the affairs of the business. After the auditors have issued a report certifying that the statements are a true representative, they issue the directors with the statements. The directors’ responsibilities concerning the financial statements are to ensure that the information presented therein is accurate and that the correct treatment of the various accounting classes is adhered to. They should also ensure that there is adequate disclosure of information pertaining to the statements and if some information is missing, they need to ensure that it is included. Then these financial statements can now be presented to the shareholders for various usages including decision making concerning various investment options. In the question above, the financial statements were negligently prepared and were showing a profit instead of a loss. It was the mistake of Harvey who was the accountant of the firm and had not yet realized there was a mistake. Since Edna and Harvey are the directors who have control or are in charge of the daily running of the business, they out to have inspected the financial statements and ascertained that they were correct and accurate before presenting them to the other directors who are involved in the major decision making of the organization. The other three directors relied on the information presented with the hope that it was true and continued investing in a loss making investment. In this case, the two directors, Harvey and Edna, are to blame for their negligence in performing their roles in the business. If the Harvey had taken enough care in preparing the financial statements, the mistake would have been noted or he would have prepared them in the right manner. Therefore, the other three directors have a right to unanimously agree to remove the two directors from office. In the case of Australian Securities and Investments Commission v. Healey of 2011, the Centro Retail Group (CER) failed to classify some items as current liabilities as well as failed to disclose some major information regarding post balance sheet events. The group of companies did not disclose around $3 billion of current liabilities. The ASIC sued the organization for the breach of the duties by the directors. They argued that in corporation act of 2001 chapter 180 part 1, the directors have the duty to exercise their roles with due diligence and care in a reasonable manner. The judge, Middleton J, decided that the directors were liable for their negligence in exercising care and skill in their work since they were required to be thorough and keen in examining the financial statements. Question 2 a) What type of business organization Glen and Len are currently operating It is evident that the two brothers are the only parties to the business. They inherited the business from their great Uncle Fred. Therefore the business is a partnership. Before the two brothers inherited the business, it was a sole proprietorship since only their great uncle Fred ran activities of the winery. This is for some few reasons. A partnership is defined as a form of business operation in which it is not incorporated and is meant for profit making. It might be in form of a retail business, service provider as well as professional practitioners. A partnership is comprised of two or more people that come together and agree to work on their mutual interest. In this case, it has only two brothers who work together for mutual benefit. That is the first reason I say it is a partnership. A partnership must have a partnership agreement in which it lists and explains the terms of the agreement. For instance, it explains the basics of the business such as the name and location, duration of the partnership, initial investments, profit and loss share, and capital contribution among other factors. In this scenario, the two partners share their profits and losses’ equally meaning it is a partnership form of business (Sheffrin 2002). Lastly, there are three common types of businesses which are sole proprietorship, partnership and a public or private company. A sole proprietorship is made up of one person who runs and is responsible for all the activities of the organization. A public company must have shares and must be incorporated. Since the information of the brothers glen winery does not talk about being incorporated or having only one person to run the whole organization all by himself, we cannot say it is a sole proprietorship or a public limited company. b) Whether their current business structure is the most suitable vehicle for selling part of the Brothersglen Winery to Pierre or whether they should consider another form of business structure, and, if so, which one? I think the best solution at the moment is not to sell some part of the business out to Pierre Vigneron. Rather, they can consider introducing him into the business in another form and not necessarily as a partner. The implications of introducing him as a partner in the winery is that the decision making power will be dissolved or he will also be party to the decision making process in equal measures as them. Profit will also be distributed equally among the three of them either equally or according to the capital contributed and this means that they receive less of the profit. Even though they will increase the capital base of the company and also increase the diversity and specialization aspect since they are to partner with the well-known and experienced winemaker, there is another better way to deal with the situation. They can consider other forms of capital rising rather than selling the whole part of the business. For instance, they can consider acquiring a bank loan which they can pay with interest at the end of its repayment period. They can as well ask for funding from friends, relatives or close business men they have. It would be more advantageous than selling their rights to another party. This would be the best option if the brothers only needed money for investment. But in this scenario, they need both the expertise of the wine maker as well as his finances. The best way to go is by incorporating the company. They will have killed two birds with one stone. In this type of business, they will receive both funding and the expertise required in running the operations of the entity. For one, they will be permitted by law to raise money through the issuance of shares for the general public to subscribe to. This is a safe method as the share are redeemable whenever they want to unlike the partnership in which a partner cannot be sent packing without dissolving the whole partnership. They can also get the expertise of the French winemaker by hiring him as an employee in the organization. Therefore, my advice is for them to consider incorporating their current form of business into a publicly traded company. Question 3 Peter is a director of Leap Research Pty Ltd, an innovative pharmaceutical company. The company’s primary business is research into and development of new medications and medical devices. In January 2014, Peter is contacted by an employee of a rival company and asked for information regarding a new drug being developed by Leap Research. He accepts $2000 in cash for each piece of information regarding the new drug and the process to develop it. In fact, to date he has received more than $40,000 for the information. Leap Research has just found out that Peter has been secretly giving the rival company information. What legal remedies are available to Leap Research Pty Ltd in corporation’s law? Can Peter be charged with a criminal offence? A company’s board of directors is a group of senior officials that oversee or supervise the overall running of the organization. They are selected by the shareholders and are entrusted that they will represent the shareholders interest in all their activities. They are usually the ones to elect or appoint the senior managements such as the chief executive officer and the general manager. Apart from appointing them, they are supposed to supervise them and decide what remuneration will suit the managers and therefore, they can demote a manager due to improper conduct or poor performance. They are also supposed to give the organization direction in terms of setting in place strategies, mission and visions that employees can work with every day. They also monitor and control the organizational employees and management (Ford 2012). Apart from these responsibilities, the members of the board of directors have statutory and fiduciary responsibilities. For instance, they are required to act or exercise their powers in good faith such that their actions portray the furtherance of the shareholders interest. They are also required to exercise due diligence, skill and care as they hold their office and must consider the employees interest. The main aim of shareholders is to get returns from their investments made in the company. Therefore the shareholders will be keen to see how their performance will be in terms of profitability. For this reason the shareholders require that the directors should have no conflicting interest between their interests and the shareholders interest or between the directors’ interest and outside members’ interests. If in an investment situation there is a conflict of interest, they should not be involved in those decisions and if they indulge in the transaction, they should disclose their interests in the transaction. The fiduciary duty that is involved in this scenario is the responsibility of the directors to safeguard and protect the shareholders assets and investments in the best way as possible coupled with the confidentiality agreement terms as set forth in their holding of office. Being the heads of the organization, they are supposed to represent the shareholders’ interests in the company. In so doing they are supposed to ensure that their assets are taken care off and that they are kept in good terms. Organizational assets include the equipment and human capital that work for the organization, plants as well as the formulas and confidential methods of operations that give them the competitive advantage or that help them keep their business going. In a confidentiality agreement, directors agree to keep the organizational secrets to themselves and not to disclose of any confidential data regardless of its nature either written or verbal. They also agree to protect the confidential information in such a manner that they prevent inappropriate access by unauthorized persons. If they find that the information has been accessed by unauthorized personnel, he will inform the chief executive officer for relevant action. They are neither supposed to use this information for their personal gains. In this case, Peter receives money in order to give the private information to the rival company for them to make the drug before they could make it themselves. This is against the corporation law confidential agreement that requires him not to give away confidential or secret information to anyone especially the competitors. According to the case of Eurasian Natural Resources Corporation Ltd v Judge of 2014 number EWHC 3556, a former director of the Eurasian natural corporation had breached the confidentiality agreement that he had signed in the beginning of the term as director. He had agreed not to disclose any information pertaining to the organization but was found to have given out private and confidential data during his tenure as director and after his termination. The claimant was applying for an injunction and delivery up of the information that had been circulated which the judge agreed to. Peter can be held liable for breaking the confidentiality agreement and sued under the criminal law. The remedies to this case include application for injunction of further use of the information obtained and circulated illegally as well as a claim for damages of all the money he received as compensation of around $40,000. Question 4 What legal action, if any, can Ken take under the Corporations Act? During the incorporation process of a company, there are several documents that need to be submitted to the registrar of companies for assessment. Some of the documents include form 1 which defines the name and location of the business entity, the physical address, details of the company directors and their contacts, occupation and dates of birth and the form 12. Form twelve contains the legal requirements for an incorporated company. It must have solicitors who are responsible for formation of the company who is a director or the company secretary which must be signed by a commissioner of oaths. But with the development of technology, there is no form 12 and it is replaced by going to a company formation agent. The most important documents that are filed with the registrar for companies are the memorandum of association and article of association Means (Benjamin 2008) Memorandum of association explains the relationship between the members of the company and any outsiders. Outsiders include the government, investors, general public among others. It informs that the subscribers are willing and have mutual agreement to form the company and become active members. They therefore receive at least a share each. It aims at ensuring a healthy relationship is built between the company and the outsiders. It is also the document that explains the number of share that can be subscribed by the public. Article of association is the other important document that specifies and explains the relationship between the internal parties and themselves. It explains or lays ground rules for the relationships between employers and employees, management and shareholders, management and employees, directors and employees and shareholders and employees. It sets rules of how the organization is to be run. For instance, it regulates the powers that directors have so that the shareholder can have control over them and that they can ensure that they act according to their best interests. It explains the relationship between shareholders themselves. It defines the rights of the majority and minority shareholders so as to ensure the minorities are not oppressed. The specific question is concerned with the rights of Ken as the minority leader over the John and Carol as the majority leader. Corporate law defines a minority leader as one who does not have the voting control in an organization and who have less than fifty percent of the total shares held. A shareholder has some specific rights that will make him be safe from oppression from other shareholders. For instance, a shareholder has a right to information of various documents such as the register of shareholders and directors, audited profit and loss statements, minutes to general meetings as well as the access of any debenture register. He also has the right to attend any general meeting and can vote on any issues presented in the meeting. He can call for a general meeting in some cases. Ken has the right to be treated fairly regarding any matters concerning the running of business in the organization. Oppression may include instances that the operations of a business are oppressive or are conducted in a way that is oppressive to a shareholder. In this case, ken has been excluded from the decision making process as well as being refused to access the financial statements. The remedy for breach of the minority rights can be application to the court for an dissent in which he can prevent the implementation of a certain decision that was made by the majority shareholders and in this case, non-payment of the dividends to shareholders. Ken can also apply for the court to give a redemption decision that the majority shareholders buy his shares or can also apply for damages for breach of fiduciary rights. This decision can be supported by the case of McCann v. McCann of March 2012 in which the Supreme Court of Idaho ruled on a case that a minority shareholder was denied access to the financial statements and that the directors and corporation at large had broken the fiduciary rights of the minority shareholder. The court held that the shareholder could sue the directors and corporation and recover damages or redemption of the shares. Question 5 What are the different contexts in which the Corporations Act promotes timely disclosure of relevant information? Which types of companies are subject to the highest levels of disclosure and why is this so? Discuss. Management of any company is entrusted with the function of decision making in which they rely on the financial reports that are generated by the accountants and finance officer of the organization. These documents that are prepared must fulfil some major requirements that make them appropriate for usage by management. The managers make decisions on behalf of the shareholders who have put their money in the organization for it to gain interest. In publicly traded companies, the shareholders will look to invest in the most profitable organization at a specific day. They rely on the information present in the security markets to make their decisions of the best option to invest in. Therefore, these organizations must present performance information immediately or as soon as possible. The corporation act has encouraged the disclosure of information to the shareholders in order to facilitate accountability and transparency in the corporation documentations. It requires that the information which is presented to potential or current shareholders should be relevant to the current financial period. It should also be accurate such that all the information is well constructed and should reflects the actual state of business in the organization. The information should be provided in a timely manner so that decision making can be made when it still matters. Disclosure of information to the shareholders and stakeholder has been a major factor to the growth of accountability in any organization. The publicly traded companies are the organizations that the corporation act requires to supply the investors and the shareholders with timely information. Public limited companies are those organizations that have share capital of which is subscribed by the public or in general term, investors. These investors buy these shares by their current market price that is in the security exchange market. These prices represent the trading levels of the corporation. Therefore, the information that is presented in the financial statements should be incorporated in the prices of the shares immediately. In an efficient market, the information released by the organization is incorporated immediately into the prices of the shares unlike the inefficient market that has delays and the price of the shares may not represent all the information available in the market. Information of a publicly traded company should be disclosed to the investors and shareholder in time to facilitate informed decision made on selling the shares of corporations that have less profit and buying securities of corporations that have high activities and higher rates of returns (Gordley et al. 2006). The corporations act has listed the various times at which the organizations must provide investors, shareholders and all relevant stakeholders with timely and accurate information. The first instance is during the annual general meetings. During these meetings the investors and shareholders analyze the financial position of the company and analyze how their funds have been invested. Directors should present audited reports and financial statements to the shareholders which will include the remuneration and salaries for all the personnel in the organization as well as the investment options that the management have in mind for future and current investing. The other instance is the reporting of the information about their share prices in the stock exchange market. The information presented here should be accurate and timely to facilitate informed decision. WORKS CITED Means, Benjamin, “A Voice-Based Framework for Evaluating Claims of Minority Shareholder Oppression in the Close Corporation 97,” Georgetown Law Journal, October 15, 2008. Australian Securities and Investments Commission v. Healey GF6729 US 516. The Supreme Court of the US. 2011. Legal Information Inst., Cornell Law School, n.d. Web.1 March 2011. Ford, H. A. J, “Ford and Austin's principles of corporation law (KF956 F69).” (8th ed.), 2012. McCann v. McCann 21 ECHR 97 GC, Idaho Supreme Court. Legal Information Inst., Cornell Law School, n.d. Web. 13 May 2012 Steven M. Sheffrin. “Economics: Principles in action.” Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 190. 2002. Gordley, James R.; von Mehren; Arthur Taylor, An Introduction to the Comparative Study of Private Law. Cambridge: Cambridge University Press, 2006. Read More