Apollo and Rocky Case Analysis - Assignment Example

Individual Research Name Date Course Question 1 Part a Apollo and Rocky breached their duties as directors of the company. The directors of a company are supposed to make business judgments that will ensure that the company is able to progress. According to section 180(1), of the Corporations Act 2001 (Cth), the directors are supposed to exercise their powers with diligent and care that a reasonable person would do if they were directors. In the case of Peter James Shafron v ASIC, Shafron was found guilty of breaching Section 180(1) by approving misleading announcement1. After the company had already spent $ 5million and the survey indicated that the area had low levels of gold deposits, it was only reasonable to stop the operations. Apollo and Rocky would have learnt from the results of the survey that the area did not have much gold deposit and continuing with the exploration would lead to losses to the investors. According to section 180(2) (c), the directors should make business judgment after informing themselves about the subject of the matter of judgment to the extent that they believe it is reasonable. Apollo and Rocky made the business judgment that was not reasonable. Their business decision was only guided by optimism which cannot be considered as reasonable considering that the results from the survey had indicated that the area had low levels of gold. It was the civil obligations of the two directors to ensure that the decisions that they make is reasonable enough and does not contribute to wastages or loses to the company. It was unreasonable for Rocky and Apollo to ensure that the project continues after the results of the survey had clearly indicated that there are had low levels of gold deposits. Part b Although the two directors breached their duties, they have some arguments in their defense. The mining industry is unpredictable and there could have been chances that the exploration could have yielded good results which could have been beneficial to the company and investors. It can therefore be argued that they made the decision in good faith which is in accordance with section 180(2) (a) which requires the directors to make the business judgment in good faith. According to section 181(1) (a), the directors have a duty of discharging their duties in good faith and ion the best interest of the company. Apollo and Rocky thought that it was for the best interest of the company to continue with the exploration process. They were optimistic that the company will benefit incase a major discovery was to be made in the process2. Their decision was guided with optimism as the company would have been a major beneficiary. According to section 182(1) (a), the directors are not supposed to make decisions for their own personal gain. The decision of Apollo and Rocky was aimed at ensuring that the company fully benefit. They were not making the decision for their own personal gain. It is also the duty of the directors to lead the company to success by making decision that they feel would contribute to the success of the company3. It can therefore be argued that they were performing their duties as directors by leading the company to success. Part c Clubber who is the chair of the company breached his duty by allowing the explorations to continue taking place. This is despite obtaining the information about the uncommercial nature of the project. Although he was against the move, he decide that it should go ahead in order to avoid arguments with Apollo and Rocky who were optimistic about the project. According to section 182(1) (a), a director should not use their position to gain advantage to someone else4. Cubbler breached his duty by allowing the exploration to continue for avoiding arguments with the other directors. This means that he allowed the project to continue in favour of the two directors. According to section 189, the information that is provided by experts should be relied upon. As the chair of the company, he chose to ignore the information that had been provided by the experts which indicated that the region has low levels of gold deposits and was therefore uncommercial. Cubbler was little optimistic about the potential of the region after receiving the information from the survey. This means he was aware that continuing with the exploration could be detrimental to the company as the money would be exhausted without finding much gold. According to section 183(1) (b), the directors of a company should not use information to cause detriment to the company. Part d Drago as the chief financial officer did not breach any duty. It is the duty of the chief financial officer to provide accurate financial information of the company. According to section 286, the chief financial officer has the responsibility of keeping the financial records of the company5. The financial information that was provided to the directors indicated that $ 5 million had already been used during the survey which indicated that the gold deposits are low in the area. The directors made the decision to continue with the exploration despite obtaining the financial information. This exempts Drago as the Chief Financial officer from breach of duty. According to section 290, the directors should have an access to the financial records of the company. This took place as the directors were aware that the company had used $ 5 million and had not gained any success. This therefore indicates that the Chief Financial officer did not breach his duty during the process. It is the responsibility of the directors to analyze the financial records and make decisions based on the financial position of the company. In the case of ASIC v Healey, the Federal Court of Australia held that it is the duty of the directors to approve accounts and reports as part of duty to care and diligence6. Drago raised his opposition to the exploration process due to the financial issues which is an indication that he performed his duty as the Chief Financial officer of the company. Question 2 Part a The directors of a company have the responsibility of acting in the best interest of the company. In the case of Links Golf Tasmania Pty Ltd v Sattler, the federal court of Australia upheld that the directors have a duty to act in the best interest of the company7. The directors are supposed to ensure that the company is successful in its operations. However, during the course of their operations, they are required to act in good faith. According to section 181(1) (a), the directors are supposed to act in good faith and in the best interest of the corporation. It is in the interest of Citrus Corporation to have a high share price in order for it to benefit during the hostile takeover process. However, there should be a transparent process that should be carried out to ensure that it is possible. The actions of the directors to Provide Mr. Lang with an interest free loan of $20 million to purchase shares in Citrus so as to push the share price is an ingenious means. It indicates that the directors were not acting in good faith although the action would have resulted to an increase in the share price of the company. The actions of the directors are mainly for defeating the takeover process. This reason is considered malicious and it is not in the best interest of the company as the primary purpose is to defeat the takeover process. Defeating the takeover process does not represent the best interest for the company. The action of the directors therefore contravenes section 181(1) (a) where the directors are supposed to acting the best interest of the company and in good faith. According to section 181(1) (b), the directors are supposed to act in good faith while discharging the duties and for proper purposes. The directors were not acting in good faith as they were using ingenious means. The purpose of providing loan to one of the directors was to defeat the hostile takeover process. This is considering that the takeover process was hostile and the directors were against it8. This is an indication that the directors were not discharging their duties for proper purposes. The directors were using their powers to fight the takeover process through the use of ingenious means. This can also be considered as abuse of powers by the directors of Citrus Company. According to section 182(1) (a), the directors are not supposed to use their position improperly to gain advantage for themselves or other9. The directors were however using their powers mainly for the purposes of gaining an advantage for themselves as they were against the hostile takeover. The ingenious scheme by the directors would have seen the share price rising and hence benefiting them as the hostile takeover would have faced defeat. An increase in the share price would have forced Anglo Brit limited to abandon the hostile takeover process. According to section 182(1) (2), the directors are not supposed to use their position to cause detriment to the corporation. The directors of the corporation were using their position to cause detriment to the company so as to defeat the takeover process. Dishonest means were also being used by the directors to defeat the hostile takeover process10. Part b Anglo Brit Ltd can take legal action against Citrus Ltd for the use of ingenious tactics to defeat the hostile takeover process. This is because the ingenious tactics of Citrus Ltd amounts to the contravention of sections of The Corporations Act 2001 (Cth)11. According to section 184(1) (b), an offense is committed when the directors are intentionally engaged in dishonesty. The directors of Citrus Ltd were intentionally engaged in dishonest activity by providing $20 million loan free to purchase the shares of the company. This is an indication that the company has committed an offense and legal action can be taken by Anglo Brit Ltd. According to section 184(1) (c), it is an offense for the directors not to act in good faith and to the best interest of the corporation12. The directors of Citrus Ltd did not act in good faith when they decided to use the ingenious tactics to defeat the takeover process. Their failure to act in good faith can be used by Anglo Brits Ltd to take legal action Citrus Ltd. According to section 184(1) (d), the failure of the directors to use their powers for proper purpose is an offence. The directors of Citrus Ltd used their powers for the purposes of dealing the hostile takeover. This is an offence and legal action can be taken against Citrus Ltd for engaging in such activities. The offence committed by the directors can therefore be used for the purposes of taking legal action against the company. According to section 184(2) (a), it is an offense for the directors of the company to use their position dishonestly for their own benefits or to cause detriment. The directors of Citrus Ltd had committed this offense by engaging in dishonesty through their tactics to defeat the hostile takeover. The directors of Citrus Ltd would benefit incase the share process increases. This is considering that the offer that has been made by Anglo Brit Ltd is low. The directors of the company would benefit incase the share prices increase. An increase in the share prices may also affect the hostile takeover. The tactics that has been used by the directors of Citrus Ltd has caused offenses which have civil liabilities. According to section 1317E, a civil penalty applied for the directors of companies that contravene section 181 and 182. This therefore indicates that the Anglo Brits Ltd has the opportunity to take legal action against Citrus Ltd for the offence committed by the directors. However, it is also important to note that Anglo Brit Ltd will have to prove beyond reasonable doubt that the offense has been committed. The directors of the company may be banned from holding similar positions by ASIC in case they are found guilty. In The case of Australian Securities and Investments Commission v Hellicar the directors of the company were banned from holding office after they were found guilty of breaching their duties as directors of James Hardie Company13. Taking a legal action will also be important for Anglo Brit Ltd to ensure that the ingenious plan to defeat the hostile takeover does not work. References Australian Securities and Investments Commission v Hellicar [2012] HCA 17 Peter James Shafron v ASIC [2012] HCA 18 ASIC v Healey [2011] FCA 717 Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634 Corporation Act 2001 (Cth) Gibson, A. and Fraser, D. (2014) .Business Law, 7th ed. Pearson Ciro, T. and Symes, C. (2013). Corporations Law In Principle, 9th ed. Thomson Reuters. Austin, P. and Ramsay, I. (2012). Ford’s Principles of Corporations Law, 15 ed. LexisNexis. Lipton, P. and Herzberg, A. (2014). Understanding Company Law, 17 ed. Lawbook Co. Read More