Foundations of Company and Commercial Law - Assignment Example

FOUNDATIONS OF COMPANY AND COMMERCIAL LAW Name Code + Course Name Professor Date Foundations of Company and Commercial Law Question One a) Businesses adopt various structures that ensure maximum returns on investment and minimum cost of operations. Some entrepreneurs utilize different structures due to their expertise and company model. Notably, Rachel and Stacey adopted the partnership business structure to maximize their profit margins and ensure smooth operation. According to Hillman, partnership structure emphasizes on existence of a business model1. People who intend to utilize partnership structure must have viable business ideas. Equally, their ideas and practises should aim at generating profits through sales or services. In this case, Rachel and Stacy have a proven concept because they operate a busy café in Melbourne. Their corporation has numerous clients thereby they enjoy excellent profit margins and consumer loyalty. Equally important, there must be two or more persons to operate a partnership business structure. The Australian Law demands that a partnership must have two or more persons with common interest. Their activities and business operations must be within the law and benefit the locals. On this regard, Rachel and Stacy are two individuals with a corporation. Their activities are within the Australian Law as they operate a café that provides restaurant service to the locals. Their activities benefit the locals through provision of food. Additionally, their activities benefit the national government since they pay taxes and generate revenue. What is more, there must be a legal binding between the individuals that form a partnership business model. The Australian Authorities demands that entrepreneurs must sign contractual relationships before they operate a partnership business. Hillman states that the contractual relationship guides the operation of the organization as it assigns various tasks to partners2. Equally, it spells out the contribution ratio of capital among partners. The contract states the purpose and name of the enterprise. Rachel and Stacy have a partnership structure since they share the profits of the company equally. It ensures no partner incur losses or exploits the other when the firm makes profits. Besides, partnerships are often based on the principle of agency and unlimited liability. The law of agency demands that each entrepreneur should represent the other. As a result, partners have the right to carry business on behalf of others. Additionally, partners have unlimited liability thereby their private property can be attached to meet the liabilities of the organization. Rachel and Stacy represent the interest of each other in the organizations. As a result, each partner can conduct business on behalf of the firm. Besides, partnerships have varied duration of existence depending on the contract provisions3. Some partners manage their businesses for specific periods and dissolve them once they have achieved their goals. On the other hand, other partners operate their organizations for unlimited period. Rachel and Stacy do not have a particular time to end their relationship. The two have been in business for the past five year and are open to expanding their model. Their dilemma over how to acquire capital to expand the enterprise confirms their desire to remain in operation. Nonetheless, in the event that any of the two passes on then the business comes to an end. b) The firm needs to adopt another business model even though the current has been successful. Adoption of another excellent and cost-effective business structure will benefit the organization as it will expand and improve its production and profits levels. Particularly, the enterprise should utilize limited liability business structure due to its advantages. Limited Liability Company (LLC) obtains the status of independent enterprise that operates on its own and performs similar operations to partnership4. LLC protects the partners or owner from personal liability for its action. Rachel and Stacy will not have to be liable to the creditors when their business perform poorly. Their private property such as houses, lands or cars are protected through the provisions of the law regarding this structure. Additionally, they do not have to answer privately to the activities of their corporation in a court of law. As a result, the law bars any party that sues the organizations from confiscating their private property while seeking compensation. Additionally, LLC provides excellent conditions for operating a business model. Proper management of the daily operations of an organization ensures its growth and development. According to Steele, LLC provides that a corporation should have a certain member as the manager who oversees its operations daily5. The manager supervises workers and ensures they remain productive and motivated to provide quality services. LLC principle allows either Rachel or Stacy to manage the company. This practise enables the two to concentrate on growing the organization through good leadership. Additionally, the company saves on cost of hiring a manager because the employees are among the members. Further, LLC enjoys flexibility in taxations. Most countries demand that businesses must pay tax to fund the economic growth and infrastructural development. Taxes reduce the profits margins and revenues of organizations. Firms that operate under LLC business structure enjoy flexibility in tax based on their number of members. As a result, members have the freedom to choose the type of taxation methods that make sense to them. Rachel and Stacy have the right to choose taxation based on the number of partners. In this case, the authorities should tax them as partners. This taxation policy helps the organizations to save on cost of tax and operation as compared to other enterprises with varied business structures. Equally, LLC business structure is easy to create and lasts for unlimited time. Creation of organizations is often tiresome, stressing and costly. LLC structure is easy to form as it requires members to fill the articles of the firm and state where they will locate their headquarters. Rachel and Stacy can easily change their business model through signing of the relevant article of organization. They can acquire the standard form from the Australian secretary of state. The acquisition of the form from the relevant authorities ensures they sign an authentic document that the state recognizes. Equally important, LLC can operate forever since the death of any member does not affect their existence. For instance, Stacy will continue with operation and production even if Rachel dies. It is an advantage over partnership that demands dissolution of a business if one partner dies. Apparently, LLC is the best structure the two can adopt to ensure maximization of profits at minimal costs. QUESTION 2 Issue Tavid, Suzan, and Dilara are shareholders of Vintage Dress, a company that sews and sells vintage boutique dresses. Each of them has one third equal share. Tavid and Dilara are non-executive directors whereas Suzie is the managing director of the company. The company has been very profitable and hence opts to buy modern art sewing machines. Tavid recommends Sew West Pty Ltd as he controls it together with her daughter. Suzan is aware of that he has interests in the company but fails to ask him for details and also fails to inform Dilara about it. In another instance, Dilara acts on her own behalf and forms a new company with Second Hand Fabric Store, a store that had previously sought to form a joint venture with Vintage Dress but the company declined due to lack of facilities and resources. The new company successfully creates garments and makes very large profits. At this point, Vintage Dress starts making huge losses. After review of financial statements in a board meeting, it is discovered that the financial statements were prepared in a negligent manner and hence showed a profit instead of loss. Tavid fails to inform the board about this and Dilara does not ask any questions regarding the financial statement and is also absent. Suzan fails to read the financial statement due to time constrains believing that she would be informed of any important issues by Tavid. The board of directors fails to identify the mistake and hence authorize more investment in the loss-making company ventures. The company becomes insolvent after a few months. The issue, in this case, is whether the directors breached their duties especially in the light of the company becoming insolvent. Rules The directors have various civil liabilities in relation to the events that led the company insolvent. Directors have various duties under the common and statute law. Common law duties entail acting in good faith in the preeminent interest of the corporation; acting for proper purpose; avoiding conflicts of interest; not making secret profit; acting with due care skill and diligence. On statutory duties, directors should disclose material personal interests; prevent a company from trading while insolvent; practice due care and diligence and also avoid conflicts of interest. These general duties of directors are underlined in the Corporations Act 2001 (Cth). Directors may be sued for breaching common law and statutory duties. Section 180 of the Act states that directors should act with the degree of care and diligence that a reasonable individual may be expected to exhibit in the role. This same duty is imposed on the directors at common law. Section 181 requires the directors to take action in good faith in the optimum interests of a corporation and for the correct purposes. This includes avoiding conflicts of interest and revealing and managing conflicts if they come about. Directors are under fiduciary duties to avoid undisclosed conflicts between personal interests and the interests of the company, for instance, misusing confidential information, undisclosed personal profits, and a director having a personal interest in a transaction with the company. Directors are required to disclose the material personal interest to the board (section 191). Section 182 requires directors not to inappropriately exercise their position to obtain a gain for themselves or another person or to the disadvantage of the firm. Section 183 (10 requires directors to use the information they obtain while undertaking their duties improperly to benefit themselves or another company or to cause harm to the company. The business judgment rule also applies in this case. Directors have to be allowed to make business decisions and business judgments. Statutory 180 (2) protects directors from personal liability for business judgments’. The business judgment rule protects the authority of directors in exercising their duties. If a venture fails, the director is not automatically responsible and is judged under the Donoghue v Stevenson6 test of negligence. Directors also have a duty to prevent insolvent trading under s588G. Contravention of this duty occurs if the person is aware at the time that there are grounds for suspecting insolvency; a reasonable individual would be aware of such grounds and thirdly, the person fails to prevent insolvency. Breach of section 588G may lead to a breach of the duty of care, skill and diligence. Application The duties and responsibilities of directors under the Corporations Act 2001 apply to the directors of Vintage Dress Company. The three directors contravened various statutes under the Act. Tavid contravened the statutory duty of disclosing material personal interests by recommending that the company purchase new sewing machines from Sew West Company, a company that she and the daughter control. Tavid took advantage of his position to obtain some advantage for his other business and failed to disclose it to the other directors as required in s191. Tavid also contravened the duty to operate in good faith and the interests of the corporation at common law. As fiduciaries, she owed a duty of economic loyalty to the firm and hence not exercise her power for the private advantage. She failed in her duty to avoid potential and actual conflicts of interest and duty-between her personal interests and her duty to the company. In addition, Tavid also failed to inform the Board that the financial statements were prepared in a negligent manner hence contravening her duty to act in good faith and the interest of the company. Nevertheless, Tavid can be saved by the business judgment rule in Section 180(2) that states legitimate business judgment is exercised is it is made in good faith, and she held a rational belief that judgment is in the best interests of the company. Tavid has to fulfill the requirement that there was no material personal interest7. Tavid also contravened section 182 on duty not to make improper use of position. She engaged in conduct with the purpose and intent of obtaining an advantage. Suzan contravened the common law duty of acting in good faith in best interest of company. She failed to ask Tavid about Sew West Pty Ltd although she was as aware that she had certain interests in the company and also failed to inform Dilara about it. Suzan breached the duty of good faith as she failed to give proper consideration to the interests of the company8. In addition, she contravened the s 180 (1) provision on duty of care and diligence that requires the directors to exercise their power and discharge their duties with degree of diligence and care that a rational individual would apply. In this case, the probable risk of harm can be balanced against the probable advantages that could practically have been expected to impact the firm from the behavior in question9. Suzan also failed to read the financial statement due to time constrains believing she would be informed about relevant matters. She thus contravened the provision of duties of care skill and negligence. If she has read the financial statement, she might have prevented insolvent trading. Dilara contravened s183 on ‘duty not to make improper use of information’. Dilara formed a new company with Second Hand Fabric Store, a company that had approached Vintage Dress to form a joint venture. She acted on her own behalf and used the information to gain advantage for herself and the Store. She was aware of the poor financial position of the company and its inability to form the venture and hence approached the Store independently and obtained huge profits. By doing so, she also contravened her statutory duty of disclosing material personal interests. Dilara also contravened the duty to act with due care skill and diligence as required under Section 180(1). She did not attend meetings or take an active role and interest in the company affairs, for instance, she did not ask any questions regarding the financial statements. The general law places an obligation to actively participate in the company and its financial affairs, but Dilara clearly failed to do so. Conclusion All the directors thus breached their duties especially in the light of the company becoming insolvent. If these duties are breached, the company or Australian Securities and Investments Commission (ASIC) can apply to the court for compensation orders (s 1317H), a declaration of -contravention (s1317E) or a civil penalty under s1317H. Breach of misuse of information, misuse of position, and good faith are criminal offenses with a penalty of five years jail time or $ 220,000 (s 184). QUESTION 3 Issue Leo is a shareholder in Thomas The Tank Engine Company. He is a non-executive director who is unhappy with the state of affairs. Leo has not received any dividends in spite of the company revenues increasing 300%. The two executive directors have decided not to pay dividends and have awarded themselves a large pay rise and bonus. They have also approved for the company to lease two pricey cars for their exclusive use. Leo is removed from the board after he questions the dividend policy and also seeks his objective to the lease of the car be recorded. The issue in this case is whether Leo has any rights as a member or shareholder. Rule Shareholders enjoy various powers and rights that relate to having a voice in the management of the firm as well as benefiting from the profits of the company. The Corporation Act offers shareholders various rights. Section 203E of the Corporation Act clearly prohibits the board from removing an incumbent director. Shareholder rights also extend to important areas of board and executive remuneration. Corporation Act part 2F offers legal privileges for shareholders when the companies’ events are unfairly administrated as well as oppressive and allows the shareholder to sue the company for such actions. Minority shareholders are safeguarded from minority oppression by s232 of the Act. Section 232 grants relief to shareholders who are impartially exposed to discriminatory or unfair action and commercial unfairness from a company. The court if granted discretionary powers by section 233 to help the affected minority shareholder and orders for an injunction, appeal or require a particular act from the directors. Such provisions to safeguard the minority shareholders are evident in William Arthur Forge v ASIC 10where the court ruled that the majority should not use their voting power to commit con or swindle the minority through appropriating rights belonging to a corporation. In line with this, company directors are under both common as well as legislative regulation required to undertake their obligations in good-faith and for the appropriate purpose of the corporation. Section 181 to 183 of the Corporation Act obliges directors to take action that are in the best interest of the business (s181); not to exercise their powers to have an upper hand over a director or another person (s 181). Application As a minority shareholder, Leo can sue Amanda and Ruby for breaching their statutory duty to exercise powers in good faith by failing to pay him dividends, allocating themselves a large pay rise and bonus, and to leasing two pricey cars for their exclusive use. Leo has the right to hold the directors accountable for their oversight leading to violations of law. As a shareholder, Leo is entitled to dividends since the company is making profits. Amanda and Ruby also excluded Leo from the decisions on the pay hike and buying the pricey cars. As a shareholder, Leo is entitled to take part in such company decision. As a general rule, shareholders enjoy the right of voting on such important matters and are also entitled to dividend and other distributions. Leo can thus sue the company to make it act lawfully. Amanda and Ruby infringed section 203A of the Corporation Act by removing Leo from the board. ASIC initiates criminal and civil proceedings (including compensation orders and fines) against directors who have failed in their duties. It also uses bans on directors to enforce good conduct. Shareholder remedies include remedy in case of unfair conduct or oppression; statutory derivative action; application for a winding-up order; examination of individuals connected with the company application to enforce listing or business rules of a securities exchange or application for an injunction to restrain a breach of the Corporation Act11. Conclusion As a Shareholder, Leo can obtain relief from court by showing that Amanda and Ruby infringed his shareholder rights as stated in the Corporation Act 2001. The court can help him and order injunction, appeal or require a particular act from the directors. Question Four Every business entity is bound by a set of laws and regulations that guide its operations. One of such laws is the Corporation Act, whose one of its objectives is to protect against abuse of control, decision-making privileges, and general management powers12. Thereby, one of the functions of this law is to outline the notice procedures when a company calls a shareholders’ meeting as well as clarify whether procedural irregularities would result in substantial injustices. Notice Procedure According to the corporations act, shareholders can hold meetings in order to pass resolutions that will influence or affect the operations of the company. However, in order to do so, there are certain procedural requirements that must be fulfilled. These procedural requirements must be consistent with the common laws, company constitution, and other relevant legislations that apply to meetings. Consequently, the following procedures must be followed One of the procedural requirements for holding shareholders’ meetings is the provision of a notice of the meeting. This notice is provided in order to enable members to arrange to attend as well as prepare themselves to contribute during the meeting. Section 249 J of the Corporation Act notes that the notice must be in writing and can be conveyed through medium such as post, fax, email or any other method as prescribed in the company constitution. Moreover, the timeframe of the notice varies according to the type and purpose of the meeting. For instance, if the agenda of the meeting is the removal of a director, then a two month notice ought to be given to the members13. Additionally, for unlisted companies a 21-day notice must be given to the shareholders. Providing a notice is not sufficient alone, the quality of information passed through the notice is also important. Thus, Corporations Act 2001 s 249Q provides that meeting ought to be called for a proper purposes, consequently, the content of the notice should be such that it provides members with relevant information about the meeting, the agenda and that the information should not in any way be misleading or deceptive. The Corporation Act 2001(CTH) S 249 R also guides on the venue and time for the meetings. According to the ACT, all meetings should be held at an appropriate place and at a suitable time. In addition, under section 249S, the law recognizes that technology has simplified communication and thus, provides that companies can hold meetings using information technology mediums such as the internet if ample notice is provided to all participants. Adherence to Notice Procedures Although the corporations act provides that failure to follow strictly the procedural regulations does not amount to substantial injustice, there is need to have a stricter approach to such incidences. The courts appear to support this position as indicated in their rulings whereby judges have invalidated a meeting’s decisions because a company failed to provide notice of the meeting14. Also, courts have established that proper purpose of the meeting is a critical aspect as demonstrated in NRMA Ltd V Scandrett 15. Lastly, the courts have ruled that meetings must take place in proper places and at the right times16. All these examples show the importance of stricter adherence to procedures and the reasons why there should be a stricter approach to procedural irregularities. The corporation law provides guidelines on the notice procedures when convening a shareholders’ meeting. The different sections highlight how to provide notice, the timeframes, as well as the content of the notice. Therefore, although failure to follow strictly does not amount to substantial injustice, several caught rulings have demonstrated the need for stricter approach to procedural irregularities. Bibliography ASIC v Rich [2009] NSWSC 1229 Bell Resources Ltd V Turnbridge Pty Ltd. 1988. Bottomley, Stephen. The Constitutional Corporation. Aldershot, England: Ashgate, 2007. Coombs V Dynasty Pty Ltd (1995). 1995. Corporations Act 2001 (Cth) Donoghue v Stevenson [1932] AC 562 Halsbury’s Laws of Australia Hillman, Robert W. "Bargain in the Firm: Partnership Law, Corporate Law, and Private Ordering within Closely-Held Business Associations, The." U. Ill. L. Rev. (2005): 171. Latimer, Paul, Australian Business Law (Commonwealth of Australia, 31ed, 2012). NRMA Ltd V Scandrett. 2002. NRMA Ltd V Scandrett. Vol 21. 2003. Steele, Myron T. "Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies." American Business Law Journal 46.2 (2009): 221-242. Walker v Wimborne (1976) 137 CLR 1. William Arthur Forge & 5 Ors v Australian Securities & Investments Commission (2004) NSWCA 448 Read More