Corporation Law Issues and Corporate Veil - Assignment Example

Running header: Corporate law Corporate law Course Name Professor’s Name Institutional Affiliation City and State Where Institution is Located Date CORPORATE LAW Week 2 Question 2 1. Corporate veil is the legal concept that separates the personality of a corporation from the personality of its shareholders thus protecting the shareholders from being held personally liable for the company’s debts and other obligations as well as far as the company’s business is conducted in accordance with the provisions of corporate legislation (Gonzalo, 2000). If not, the corporate veil may be lifted under; a) Under statutory provisions- the corporate veil is lifted; i) When membership is reduced below the statutory limit under companies Act s45 (austlii.edu.au, 2016) ii) When there is improper use of name iii) Fraudulent conduct when it is proved that a company’s winding up is intended to defraud the company’s creditors in accordance to s 588FDA (Corrs.com.au, 2016) iv) Failure to refund the application money for those applicants that have not been allotted shares v) When there has been misrepresentation in the company’s prospectus vi) For investigation of ownership vii) For facilitating the task of an inspector to investigate the affairs of the company viii) When there is liability for ultra vires act b) Under judicial interpretations; i) For protection of revenue when the veil is being used to evade tax as held in Commissioner of Taxation v Whitford’s Beach Pty Ltd (ato.gov.au, 2016) ii) In order to prevent fraud or improper conduct in accordance to ss 588G-588M (oxbridgenotes.com, 2016) iii) In determining the enemy character of the company iv) Where the company acts as an agent for its shareholders v) In case of economic offences vi) Where the company is a sham or cloak ii) In this case, it is clear that Nelda’s actions that effectively winds up Kinds clothes and establishes Clothing’s for Kids Ltd are aimed at defrauding her employees. .As such, the employees could cite the creation of Clothes For Kinds Pty Ltd as a bid to defraud them by pretending that their former employer (company) is broke and hence unable to pay them. As the sole director and the owner of the company, she would be responsible for paying the employees and hence the transfer was in bad faith. Thus, the corporate veil in this case ought to be lifted and Nelda forced to pay the employees as an agent of Kinds Clothes. iii) Yes. Legal action could be taken against Nelda personally since winding up Kinds Clothes was aimed at defrauding her employees. She also operated her company illegally as its membership is below the statutory minimum. Week 3 Question 1 a) The term director refers to a person to whom the law looks to manage the affairs of the company on behalf of the shareholders by establishing corporate management related policies and making decisions on major company issues in accordance to s179 (austlii.com, 2016). A director is a member of the board of directors and includes; -a person validly appointed as a director or an alternate director -a person though not validly appointed as a director, if the person acts in the position of a director -a person even though not validly appointed as a director, if the directors are accustomed to act in accordance with the person’s instructions or wishes. In essence, a director includes all persons considered to be directors. The difference between a director and an officer is that a director is elected by shareholders to oversee the company’s activities on their behalf. Directors are responsible for governing the organization through establishing its policies, objectives and mission (austlii.com, 2016). They also select, appoint, support and review officers. They approve annual budgets and account to the shareholders regarding corporate performance. On the other hand, an officer is appointed by the board of directors and are responsible for the management and day to day operations of the corporation. b) The two strikes rule gives shareholders an opportunity of spilling the company’s board of directors if the resolution to approve the company’s remuneration report receives a ‘no’ vote of 25% or more at two successive annual general meetings. The rule is aimed at imposing greater accountability on company directors when setting their remuneration packages (Monem and Ng, 2013). The rule is a good rule to have adopted since it has provided an additional level of accountability for directors as well as increased transparency for shareholders. This is because where the remuneration report has received a significant no votes over two consecutive years without adequately addressing the concerns raised by shareholders, the directors are held accountable since the law provides a re-election opportunity. Week 4 Question 3 a) The refusal to register transfer of shares may be justified in a number of cases; The directors of a private company may refuse to register a share transfer for a number of reasons. For a private company, the power of directors to refuse transfer of shares but the refusal must be in the interest of the company and the general body of shareholders. If the transfer will have the impact of increasing the aggregate holding of the acquirer significantly as to result to a takeover while provisions of takeover regulations have not been complied with, the transfer may be declined. A transfer of shares to a person who is legally incapacitated to enter into a contract, an enemy or alien or an insane person may also be declined. If the transfer document is a forged one, the transfer may be declined (Biz& Eco, 2010). Another reason is Pre-emptive rights- this right restricts the members’ right to transfer shares to nonmembers. On the other hand, public companies my refuse to register the transfer if the transfer instrument is not proper or any law relating to the transfer has not been complied with. If the transfer is in contravention with any law or is likely to result in the change of the company’s management or if it is prohibits by any court or tribunal, then it may be declined. b) Mercia does have remedy under the corporations’ act 2001. This is because the ground for refusal to register the transfer is not in the best interest of shareholders. In other words, despite her character, she does not pose a threat to the company’s management. Thus, she ought to sue the directors so that if the court is satisfied that the refusal was not justified, it may order the board to register the transfer in accordance to s107F (austlii.edu.au, 2016). Alternatively, if the shares can only be sold to a member of the company, then the court may order that the shares be purchased by the company or such a member so that Mercia can recover her money. Week 5 Question 4 The purpose and usefulness of proxy votes a) Proxy votes give an opportunity for members whether individuals or body corporates who may not be physically present at the shareholders meeting to cast their votes through a representative or a proxy. This is in line with s250D. Proxy votes are as important as normal votes since the proxies can vote on all the issues needed to be addressed in a general meeting in accordance to ss 249X-250D (Bottomley, 2013). Thus, proxy votes are useful in passing both ordinary and special resolutions and are as important as votes that are cast by company members. Where a member has appointed two or more proxies, then the value of proxy votes will be proportional. A proxy holds equal voting rights are the member who appointed the proxy. b) i) The meeting had the power to adopt the internal rules set out above if the notice was given to all members in accordance to s249H (2) and s249 H (1). This is because the meeting that passed the special resolution to change the company’s internal rule had a quorum of 2 members while the special resolution was passed by the holders of more than 75% of the votes cast by members entitled to vote on the resolution. In addition, the resolution had been put by members controlling at least 5% of the votes according to s249 ( Austlii.edu.au, 2016). ii) Marcia has a number of grounds to challenge the notice requiring her to sell her shares. First, she can argue that the notice to the meeting that changed the company’s internal rules was not properly communicated s249H (2) and s249 H (1). This is if the method she elected is not similar to the one they used. Thus, she can argue that based on this, the resolution is void and hence since the notice requiring her to sell her shares is anchored on the special resolution, then the notice is also void. Secondly, she can argue that the special resolution that gave rise to the notice requiring her to sell her shares was unfair to her as a minority shareholder and hence the notice should be discarded. She can argue that the notice is aimed at committing fraud on her as a minority and hence that her voting rights should be protected against the improper action by the majority that aims at harming her rights as held in Residues Treatment & Trading Co Ltd v Southern Resources Ltd (Willcocks, P2010). Week 6 Question 3 The business judgement rule-This is a presumption that when making a business decision, the corporation’s directors acted on an informed basis, in good faith for a proper purpose, they do not have a material personal interest in the subject matter of the judgement and they inform themselves about the subject matter of the judgement to the extent they reasonably believe to be appropriate (Austlii.edu.au, 2016). In addition, the directors rationally believed that the judgement is in the best interest of the corporation. The purpose of the rule is to make officers, managers, directors and other corporation’s agents immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in good faith as held in Otis & Co. v. Pennsylvania R. Co (lawteacher.net, 2016). a) The transfer of shares clause in Petrotide’s constitution is valid and legally enforceable. However, the refusal to transfer the shares must be in the company’s best interest. The refusal may also be valid if the reason is Pre-emptive rights- this right restricts the members’ right to transfer shares to nonmembers. However, if the director’s refusal is not in the company’s best interests, then the directors will not have acted in the interest of the clause. b) The directors can refuse to register Marcia’s transfer of shares in line with the above clause. However, Marcia can challenge Petrotide’s refusal to register her transfer of shares by claiming that the refusal was not in the interest of the company as held in Re Smith & Fawcett Ltd (Radmond, 2013). She can claim that by refusing the transfer, the directors did not act in good faith. Their refusal to transfer is based on her father’s character and it has not been proved that Mercia’s character is similar to her father’s and hence it would harm the company. Furthermore, Mercia is her father’s sole heir and hence the refusal to transfer is solely in bad faith and in breach of their duty as directors and that by refusing to register the transfer, the directors did not act for proper purpose since Mercia becoming a shareholder in the company is not a threat to the company despite her late father’s character unless the directors can prove this as held in Australian Metropolitan Life Assurance Co Ltd v Ure (Bartholomew’s, S2015). Week 7 Question 1 a) As soon as a director becomes aware that there is a real, sensible possibility of conflict between his/her personal interests and the corporation’s interests, the director ought to immediately declare their interests to the company. The directors have a strict duty of notifying other directors of their material personal interest when a potential conflict arises unless there is an exception to disclosing that interest as stated in s 191 (crickey.com ). In this regard, all facts related to an interest must be declared at a directors meeting and this should include the nature and extent of the material interest as well as the relationship between the interest and company affairs. Material interest is one having a capacity to influence the vote of a particular director upon the decision to be made as held in McGellin v Mount King Mining NL (1998) 144 FLR 28. b) i) Roberta has breached her duty as EY director to disclose that she has interest in WHS being the majority shareholder and one of the two directors in proposing that EY enter into a supply contract with WHS. Though the contract turns out to be profitable for EY, she should have disclosed her relationship with WHS to the other directors before the vote to enter into the contract was cast. ii) The general law does permit a director who is a member to vote in a general meeting on a matter in which the director has a conflict of interest unless the director controls the voting power or there is a connection with a related party transaction. Roberta being the major shareholder in WHS is evidence of related party transaction in this case as held in Furs Ltd v Tomkies (Oxbridgenotes.com, 2016). Furthermore, she is the managing director of EY and hence likely to influence the decision. To this extent, she should not have been present at the meeting where the contract with WHS was discussed and voted. iii) There is a requirement that directors involved directly or indirectly in a contract with the company disclose the interest to the general meeting and breaching the requirement makes the contract voidable at the option of the company (Berkahn, 2001). As such, the contract should have been disclosed to the general meeting for approval before EY went ahead. iv) The remedies that EY should seek against Roberta including voiding the contract, injunction and suing Roberta in order to recover the money she has been paid in the form of fees. Since the contract is profitable, they can also ratify it. v) Statutory remedies include voiding the contract at the option of the company. Week 8 Question 4 Ch. 2j provides that a company may reduce its share capital in a way that is not otherwise authorized by the corporations act if the reduction is fair and reasonable to the company’s members as a whole and it does not materially prejudice the company’s ability to pay its creditors and in approved by members in accordance to s256c. Under an equal reduction as in the present case, the share reduction must relate only to ordinary shares. It must apply to each holder of ordinary shares in proportion to the number of ordinary shares they hold and the terms of the reduction have to be the same for each holder of ordinary share. To this extent, i) The transaction would satisfy the requirements of Ch. 2J if Ginger Ale objects to the proposed distribution on the ground that it will adversely affect her tax position for the current financial year. This is because each ordinary shareholder will be affected the same relative to his/her shareholding in accordance with s 256B (1) (ato.gov.au, 2016). All shareholders will be treated the same and hence this is not discriminative to her since even the other shareholders tax positions will be affected the same depending on theirs shareholding. Besides, the issue of paying personal tax does not concern the company. ii) The transaction will not satisfy the requirements of Ch 2j if Pepsi owes Carbonated Water Pty Ltd $600,000 since payment of such an amount to shareholders does materially prejudice the company’s ability to pay the $600,000 it owes the creditor as the amount owed to the creditor is more than the amount the directors propose to distribute to shareholders as stated in s 256 (1). b) If the proposed distribution takes place as a capital reduction, each shareholder will receive $0.25 per share. The company’s balance sheet will be affected in that its asset in the name of fruit juice operation valued $500,000 will be removed from the books while the shareholders equity will be reduced by $500,000 to $1,500,000. Week 11 Question 2 a) i) The information required in a bidder’s statement include the bidder’s identity, the date of the statement, details of the bidder’s intention regarding the continuation of the business of the target, the major changes to be made to the business of the target, the future employment of the present employees of the target. For an off-market bid, a statement that the bidder’s statement has been lodged with ASIC, consideration and how it is to be paid, details on the number of security involved in the bid and the voting power involved according to s636 (ato.gov.au, 2016). ii) A target statement contains all information that holders of bid class securities and their professional advisers reasonably need to make an informed assessment on whether or not to accept the offer in accordance to s638 (ato.gov.au, 2016). It contains a statement by each director of the target recommending acceptance of the offer under the bid and the reason why or reasons why no recommendation is made. b) Secured and unsecured creditors have too much protection under the corporations act at the expense of other stakeholders such as members, employers and customers. This is because in case of liquidation, they are paid first before the other stakeholders are paid. They are also given the option of taking over the operations of the company in case of insolvency in a bid to recover their funds. No other stakeholder is given such privileges in accordance to s579 (ato.gov.au, 2016). However, this can be understood due to the fact that they have brought their resources to aid in the company’s operations and hence it is only good that they are paid before the other stakeholders are paid. Furthermore, the other stakeholders including the employer and the shareholders have a say in the company’s management that can prevent liquidation by putting in sound management policies that will ensure the company continues to operate profitably. As such, it is only the creditors who do not have a say on how the company is managed and hence whether it operates profitably or not. Furthermore, they don’t have a say on how their funds are invested and hence the more protection they are accorded by the corporations act. 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Retrieved on 6th October 2016, from; http://www.corrs.com.au/publications/tgif/unreasonable-director-related-transactions- when-is-a-transaction-for-the-benefit-of-a-director/ ato.gov.au, 2016, Tax Ruling TR92/3-Income tax: Whether profits on isolated transactions are income, Retrieved on 6th October 2016, from; http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001 oxbridgenotes.com, 2016, Director’s statutory duty to prevent insolvent trading, Retrieved on 6th October 2016, from; https://en-au.oxbridgenotes.com/revision_notes/law-university-of-new-south-wales- business-associations-i/samples/directors-statutory-duty-to-prevent-insolvent-trading austlii.com, 2016, Corporations act 2001- Sect 179, Retrieved on 6th October 2016, from; http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s179.html Monem, R&, Ng, C2013, Australia’s two-strike’ rule and the pay-performance link: Are shareholders judicious? 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Bartholomew’s, S2015, Directors’ duties in focus-Duty to act bona fide in the interests of the company as a whole, Retrieved on 10t6th October 2016, from; http://youlegal.com.au/directors-duties-focus-duty-act-bona-fide-good-faith-interests- company-whole/ crickey.com, 2016, Corporations act 2001-Sect 191, Retrieved on 6th October 2016, from; http://crikey.com.au/ McGellin v Mount King Mining NL (1998) 144 FLR 288 Oxbridgenotes.com, 2016, Director’s duty not to make secret profit notes, Retrieved on 6th October 2016, from; https://en-au.oxbridgenotes.com/revision_notes/law-university-of-new-south-wales-business- associations-i/samples/directors-duty-not-to-make-secret-profits Berkahn, M2001, Directors duties to the company and to creditors: Spies v the queen, Retrieved on 6th October 2016, from; http://www.austlii.edu.au/au/journals/DeakinLawRw/2001/20.html Read More