Corporations

By the end of 17^th century, certain characteristic of a company had been established such as they existed in perpetuity, where they could own property, could be parties to legal proceedings and by their common seal could enter contracts independently of their members. The reason was stated by Sir William Blackstone:

As all personal rights die with the person, and as the necessary forms of investing a series of individuals, one after another with the same individual rights, would be very inconvenient if not impracticable; it has been found necessary, when it is for the advantage of the public to have any particular rights kept on foot and continued to constitute artificial persons, who may maintain a perpetual succession, and enjoy a kind of legal immortality. These artificial persons are called bodies politics, bodies corporate or corporations.

 

The common law defines a corporation by equating it to a natural person. In Smith case, a corporation was:

An artificial body composed of divers constituent members like the human body, and that the ligaments of this body politic or artificial body are the franchises and liberties thereof which bind and unite all its members together and the whole frame and essence of the corporation consist therein.

Furthermore, Denning LJ in HL Bolton said that:

A company may in many ways be likened to a human body. It has a brain and a nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre.

 WHY WOULD WE INCORPORATE

Functions and structure of companies
 

Separate legal personality
A company is an artificial person created by law (body corporate). The function of a company in a legal sense is to hold assets (property) and to carry on business and other activity, as an entity separate from the participants (investors, managers) in that business or activity. (Salomon) In this case, despite the fact that Mr Salomon controlled the company, it was not his agent or trustee. The company was treated as operating the business in its own right, and as being separate from its controller, Mr Salomon. Therefore the charge given by the company to Mr Salomon was valid and he was entitled to be paid his debt even though other creditors of the company would not be paid because the company had insufficient assets to pay all of its creditors.

Thus the effect of separate legal entity:

- A company’s obligations and liabilities are its own and not those of its participants; where a company incurs a contractual obligation or a liability in tort, that obligation or liability is the company’s and not an obligation/liability of its members or officers. Because companies are separate entities, creditors of a company are generally unable to look for the participants if the company to pay the company’s debt.

- A company can sue and be sued in its own name: section 119 of the Corporations Act provides that, when a company is registered, it comes into existence as a body corporate. As such, form that time it can sur or be sued in its own name. This means that it is not necessary for the members of the company or its officers to be named as parties to the legal proceedings where it only involves the company.

- A company has perpetual succession: this means that the company is a continuing entity in the law with its own identity regardless of changes in its membership. It continues in its existence unchanged even if its original members die, sell their shares to the others or otherwise cease to participate as shareholders. The company continues in existence until it is deregistered under the statutory procedure set out in the Corporations Act.

- A company’s property is not the property of its participants: Unlike the beneficiaries of a trust, the participants in a company have no proprietary (legal beneficiaries or equitable) interest in the company’s property. They therefore have no ownership rights in respect of it. For example in Macaura vs Northern Assurance Co Ltd.  Mr Macaura transferred his interest in timber plantation to a company controlled by him. He had insured the timber in his own name but failed to transfer the insurance policy to the company. When the timber was destroyed by fire, the insurance company refused to pay out under his policy because he did not have an insurable interest in the timber as he was not its owner. The company was the owner of the timber.

- A company can contract with its controlling participants, because they are separate legal entities. Lee vs Lee’s Air Farming Ltd, the controlling shareholder and managing director of a company that operated a business which involved aerial top-dressing farm land was killed in a flying accident. His widow successfully argued that she was entitled to pay-out under worker’s compensation insurance for her husband’s death because her husband was a “worker”, that is that he had entered into a contract of service with the company. Unless the company and its controller were separate legal entities, the finding that a contract existed between them would not be open to the court, because a contract requires at least two separate parties.

A company come into existence through a process of registration. Its existence comes to an end when it was deregistered.

Exceptions: Piercing the Corporate Veil

Despite the general rule established by Salomon’s case that a company and its participants must be treated as separate legal entities, courts are sometimes asked to “lift the corporate veil” and ignore the separate personality of the company. This request may come from a creditor of the company who wants a participant such as a major shareholder or director to be held liable for the company’s debt. This may occur:

-          At general law, where the corporate form is being used to avoid an existing legal duty; where the company is acting as the agent or partner of its controller; or where a particular law shows an intention that the corporate veil should be disregarded in applying it, or

-          Under statute, through the insolvent trading provisions.

 

This means that a person cannot choose to use the corporate form where it suits them, later ask the courts to disregard the legal effect of that form:

“If people choose to conduct their affairs through the medium of corporations they are taking advantage of the fact that in law those law not the property or actions of their incorporators or controlling shareholders. In my judgment controlling shareholders cannot, for all purposes, beneficial to them, insist on the separate identity of such corporations but then be heard to say the contrary when [it is no longer in their interest].” (Tate Access Floors Inc vs Boswell)

 

Statutory grounds for piercing the corporate veil:

-Section 588G : insolvent trading- for not picking it up sooner,

-Section 46-50: group entities’ recognised for some purposes

-Section 588FA- 588FJ: voidable transactions in some circumstances it will be

                                   overturned as unfavourable to the company,

-Section 267   : certain charges void

-Section 260D : company officer liable when company commits an offence

-Taxation Legislation

 

General Law grounds for piercing veil

-To avoid an existing legal duty “If the company has been set up for the purpose of avoiding an existing obligation under a contract or statute… the company will be regarded as a “sham” (Qintec Australia Finance Ltd vs Schoroders Aust Ltd per Rogers CJ)

Gilford Motor Co Ltd vs Horne

Jones vs Lippman

 

-Where the law requires

Re Darby: In this case, D & G had conviction of fraud and undischarged bankruptcy. They incorporated a company called “Channel Island” and were directors and shareholders. The company purchased a query licence and then set up a public company and invited people through prospectus. It then sold the licence on an over value price. Public company went into liquidation, liquidators sought to pursuit D &G for the profits they made. D argued that liquidators should sue Channel Island. The court found that D & G had set up the company as a dummy for the purpose of enabling him to perpetrate fraud. They company was set up as a “sham” and lifted up the veil, consequently made D & G liable for the account of profit.

 

Limited liability
If a company is unable to pay all of its debts then those participants who have invested money in the company are not liable to contribute anymore than what they have agreed to pay. The effect of limited liability is to transfer the risk of corporate failure from the investors in the venture carried on by the company to its creditors. This is because, once the company’s assets are exhausted, the principle of limited liability prevents the creditors from looking to any of the participants in the company to make up any shortfall.

 

Limited liability is said to:

-          Encourage risk taking and entrepreneurial behaviour, by enabling investors to quarantine their wealth from particular risky undertakings

-          Decrease the need for shareholders to monitor the managers of companies in which they invest because the financial consequences of company failure are limited.

-          Provide incentives for managers to act efficiently and in the interests of shareholders by promoting the free transfer of shares because under this principle the wealth of shareholders is irrelevant and that shareholders can be expected to be selling their shares at a discount to the price which would exist if the company were being managed efficiently.

-          Assist the efficient operation of the securities markets,

-          Permit efficient diversification by shareholders which in turn allows shareholders to reduce their individual risks. Because if unlimited liability is applied, this means that a shareholder could lose his or her entire wealth by reason of the failure of one company, shareholders would have an incentive to minimise the number of shares held in different companies and insist on a higher return from their investment because of the higher risk they face.

-          Facilitate optimal investment decisions by managers.

Liability of a parent company

The onus is:

-          The member must be the debtor’s holding company at the time the debt is incurred. A company is a holding company of another company (subsidiary) if controls the composition of the subsidiary board, can cast or control the casting a majority of votes at a general meeting of the subsidiary, or it holds the majority of casting votes at a general meeting of the subsidiary, or it holds the majority of voting shares in the subsidiary.

-          At the time the debt is incurred, or as a result of incurring the debt and any other debts incurred at the same time, the subsidiary is insolvent.

-          At that time, there were reasonable grounds for suspecting that the subsidiary was or would become insolvent and the holding company or one or more of its directors knew or ought to have been aware of those grounds.

Defences available under section 588X:

-          If the holding company and its directors had reasonable grounds to expect and did expect that the subsidiary was and would remain solvent; or

-          If the holding company formed its belief as to solvency in reliance on information provided by another person (such as an accountant) where it was reasonable for it so to rely; or

-          If the holding company took all reasonable steps to0 prevent the subsidiary from incurring the debt.

Sources of company's capital

1.                 Contributions of capital made by persons who form the company and persons who become members after the company is formed. Usually through shares; it represents a number of rights (that may or may not depending on the terms of issue of the share) include control rights and rights to receive information and distribution rights (such as a right to receive dividends or to share in the assets of the company on a winding up of the company).

 

Thus, being a member of a company means they are proprietors/ owners who have invested money in the corporation with the expectation that they will receiver a return on their money when the business is successful, either in the form of distribution (dividends) or in the form of growth in the value of their investment in the company over time.

 

2.                 Amounts of credit advanced to the company by creditors, including those who lend the money to the company and those who supply goods and services on credit. Persons who lend or advance credit to companies are not members, instead they are in contractual relationship with it.

 

3.                 Profits (if any) not distributed to members.

Public Company vs Proprietary Company
Proprietary company si one type of companies which are not permitted to have more than 50 members or to raise money by conducting a public offer of shares. In return for accepting these restrictions, proprietary companies are exempted from many company law rules that are designed to protect investors who do not participate actively in the operation of the business. Most Australia companies are these. Public Company on the other hand is a company that have wider powers to raise capital from members of the public than proprietary companies but are subject to more onerous regulation.


Company Management
Officers are persons who are responsible for the management of the company. In small companies, the members and officers may be the same people, but in large companies with many members it is not possible for all the members to take and active part tin the management of the company. Managing companies involves decision making with can include:

-          Deciding on the appropriate capital structure for the company (whether to borrow money, to pay dividends or to increase or reduce the number of shares on issue), and

-          Deciding on the nature and form of the company's activities (what enterprise to carry on, and how to use the company's capital).

 

Board of directors
Directors are selected in the manner agreed between the members and reflected in the company's internal governance rules and are usually responsible for managing the business of the company. The precise scope of the directors' powers and the division of the decision making power between members and directors all depend on the law and the company's internal governance rules.

Secretary
This is a person responsible for performing certain administrative functions in connection with the company required by law. The secretary is appointed by the directors.

THE LEGAL ASPECT OF COMPANIES

There is a lack of uniformity from State to State because the Commonwealth Parliament was not given a clear power by the Constitution to make laws with respect to all companies. Due to the literal approach of the Constitutional Law especially about section 51 (xx), company law historically have been largely a state matter. In the case of NSW vs Cth, by 6 to 1 majority the High Court held that s51 (xx) did not empower the Commonwealth to make laws with respect to the incorporation of trading and financial corporations.

Uniform Companies Act 1961 was resulted from the need to attain uniformity throughout Australia. Then, as a result of the two boars needs to improve administrative efficiency and to create a body capable of regulating the securities industry on a nation wide basis, the co-operative scheme legislation was established. This was to overcome the constitutional constraints and some of the states to voluntarily hand over their powers.

The deficiencies within it were highlighted in the Senate Standing Committee on Legal and Constitutional affairs report on the role of Parliament in relation to the National Companies Scheme in 1987. Then the Corporations Act 1989 (Cth) was made in relation to apply to trading and financial corporations throughout Australia, largely amalgamated the provisions previously contained in the Companies Code, the Companies Acquisition of shares and the Securities Industry Code and the Future Industry Code. As well as the Australian Securities Commission Act 1989, to replace both NCSC and the respective state Corporate Affairs Commissions.

In June 1990, there was a meeting in Alice Spring where it was agreed that the Corporations Act 1989 (Cth) would form the basis for future corporate regulation and the States and Northern Territory would apply those Acts throughout Australia. ASIC is there to advice the Government about any changes to a national scheme law that are needed to overcome problems it has encountered in the course of performing any of its functions/ powers.

 

Sources of Company Law

·         Case law (precedent): These are additional rules governing companies that are not contained in the Corporations Act and binding statements governing interpretation of the provisions of the Corporations Act.

·         The Corporations Regulations

·         The Australian Securities and Investments Commission Act 2001, (the ASIC Act)

·         ASIC exemptions, modifications and guidelines

·         The accounting standards and

·         The ASX Listing Rules. A private company that provides a trading facility for securities issued by companies listed on it at the Australian Stock Exchange Limited. Listing means that securities issued by the company can be bought and sold by investors through a public, organised listed market. The listing rules cover a variety of matters such as imposing additional disclosure requirements and imposing additional requirements that a company must have before the company enters into certain types of transactions or issue new companies’ securities. The purpose of the Listing rules is to ensure that the market for listed companies’ securities is transparent, liquid and informed and that the interests of the companies’ public shareholders are protected:

o        The company has a constitution and the constitution is consistent with the Listing rules eg. The constitution cannot include any restrictions on the right of members to transfer their shares;

o        A prospectus or information memorandum containing detailed info about the company and the securities is prepared;

o        The company applies for quotation of its main class of securities (usually ordinary shares)

o        The company has at least 500 security holders in the class of securities to be quoted holding at least $2000 worth of those securities each; and

o        The company meets certain tests designed to measure its viability usually required to show:

§         Profit form continuing operations over 12 months prior to listing of at least $400,000 and either:

§         Net tangible assets of at least $ 2 mil at the time of listing or

§         A market capitalisation of at least $ 10 mil at the time of listing.

§         And meet other financial tests.

§         Once listed, a company pays an annual fee to ASX.

Function of Company Law
1. Provides for the formation and ultimately, termination of companies.

2. Confers on companies some special features (eg. limited liability);
3. Regulates the relationships between participants in companies, for example of an

    outsider is a customer of the company.
4. Facilitates dealings between companies and outsiders.

The Corporations Act 2001, deals with registration of companies, memberships requirements and administration of companies in financial difficulties. Also includes provisions dealing with take overs and the regulation of securities and future markets.

ASIC (Australian Securities and Investments Commission Act 2001)
The Act establishes ASIC and confers upon its powers to administer the Corporations Act and police the activities of companies. The Act has given ASIC the power to undertake various consumer protection functions in relation to financial services. The Act also provides the establishment and operation of certain other bodies connected with the administration of company law. These are

1. Companies and Markets Advisory Committee which advises the Commonwealth Treasurer on company law reform,
2. Parliamentary Joint Committee on Corporations and Securities which advises the Commonwealth Parliament on activities of ASIC and the operation of the Corporations Act.
3. Takeovers Panel which conducts hearings to determine if unacceptable conduct has occurred in relation to takeovers and other acquisitions of shares,

4.      Companies auditors and liquidators disciplinary Board (which deals with disciplinary matters relating to duties and functions of auditors)

5.      Australian Accounting Standards Board which makes accounting standards for

use by companies)

ASIC main objectives include:

• Maintaining, facilitating and improving the performance of the financial system and the companies and other entities within that system in the interests of commercial certainty, reducing business costs and the efficiency and development of the economy; and
• Promoting the confident and informed participation of investors and consumers in the financial system.

ASIC main functions in connection with the regulation of companies are:

-          Registering companies. When a person wants to form a new company or change the status of an existing company, that person lodges a registration application with ASIC. ASIC enters the proposed new company on its register of companies and by that process, the company is incorporated.

-          Gathering and disseminating information about companies: Companies are required to provide certain information about their participants, their operations and their financial affairs to ASIC. ASIC maintains a record of that information and makes the information available (through a company search to people interested in the company.)

-          Educating companies and individuals about the law: ASIC issues Policy Statements, Practice Notes and Information Booklets which are designed to help people understand and comply with the Corporations Act.

-          Modifying the Corporations Act in certain circumstances: ASIC has the power to modify the operation of or grant exemptions from, certain provisions of the Corporations Act in certain circumstances. In this way, the law can be adjusted to take account of the special circumstances, without the need to include in the Corporations Act special arrangements to deal with every possible contingency or unusual circumstance, however, remote or unlikely.

-          Registering Company auditors and liquidators: ASIC is responsible for registering qualified to act as auditors or liquidators of companies.

-          Investigating breaches of the law: ASIC has both informal and formal powers to investigate suspected breaches of the Corporations Act/. Often these investigations occur as a result of a person complaining to ASIC.

-          Enforcing the law: ASIC can enforce the law by taking certain administrative action (for example, revoking a licence or issuing a banning order), by bringing an action for breach of the civil penalty provisions under Part 9.4B by bringing civil proceedings under section 50 of the ASIC Act on behalf of persons harmed by breaches of the Corporations Act or by referring a breach to the Commonwealth Director of Public Prosecutions for criminal prosecutions.

 

Doctrine Ultra Vires- based on limitations on powers.

We must include the intention of participants in the company’s constitution so the company’s activities be restricted. Such restrictions are envisaged by sec 125 (1) of the Corporations Act which provides that “if a company has a constitution, it may contain an express restriction on or a prohibition of, the company’s activities be restricted to things consistent with or incidental to those objects.”

However, when there is no express intention in its constitution limiting its objects or restricting or prohibiting the exercise of any of its powers, s 125 (1) states that “the exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution.” Section125 (2) states that “an act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution.” The intention of these provisions is to abolish the doctrine of ultra vires as it applies to companies so that third parties that deal with companies can enforce obligations incurred by companies, even where those obligations were incurred in breach of these internal restrictions. 34

 

HOW TO FINANCE A COMPANY

1. By sale of shares (share capital and equity capital)
2. By borrowing money (debt and loan capital)

Note that a ratio of loan capital to share capital= gearing of a company. Thus, if a company has borrowed a large amount relative to its issued share capital, it is said to be highly geared. The basic distinction between share capital and loan capital is that a shareholder is a member of the company, whereas a lender is an external creditor.

DIVIDENDS

These are the return on investment. S 245T - dividends can only be paid out of profits which must exist at the time fixed for payment of the dividend. Definition of profits:

Profit implies a comparison between the states of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of those assets of the business at the two dates… If the total assets of the business at the two dates be compared, the increase which they show at the latter date as compared with the earlier date represents in strictness the profit of the business during the period in question.

S254U: directors empowered to declare dividends and decide how and when it should be paid (a company must comply with its constitution if it contains rules that displace or modify this section).

While payment of dividends in the form of cash is the most common method, a company may also pay dividends by an issue of shares which are called bonus shares. Other methods of paying include the grant of share options and the transfer of assets. Dividends may also be applied to paying up any amount unpaid on partly-paid shares.

Final dividends: once declared was regarded as a debt dye by the company to its shareholders and could be enforced in the same way as any other contractual debts.

 

THE INTERNAL MANAGEMENT OF A COMPANY CONSTITUTION AND REPLACEABLE RULES

One the ways on which company law regulate the relationship between participants in the companies is to provide a legal framework for agreement between those participants on matters of internal administration relating to the company. Company law provides a mechanism by which participants can agree the basis on which various things connected with the ongoing operation of the company will be carried out.

As a result of amendments made by the Company Law Review Act 1998, companies are no longer need a Constitution. The Corporations Law now, contain a set of rules called “replaceable rules” that govern the internal administration and management of the companies. Thus, breaches of these replaceable rules do not itself contravene the Corporations Law. In this sense, Replaceable Rules represent private rather than public law obligations.  Consequently, the provisions in the Corporations Law regarding criminal liability, civil liability and injunctions do not apply to braches of the replaceable rules.

Section 135 (2) states that replaceable rules do not apply to single director/ shareholder companies, that is to proprietary companies in which the same person is both its sole director and its sole shareholder. Thus, they must adopt a constitution. Replaceable rules contain provisions such as officers and employees, inspection of books, director’s meetings, meetings of members, shares and transfer of shares. Thus, to decide when RR are perhaps suitable we must look closely at it and determine whether in the individual circumstances of the company, the rule is an appropriate one for the company.

Company’s Constitution:

Contents: it will set out the rules governing the rights of members, members’ conduct, directors’ meeting and powers of the directors and their appointment and remuneration. The replaceable rules serve as a broad guide to the type of rules that may be contained in a company’s constitution.

 

Objects clause: A company’s constitution may contain an object clause that identifies and restricts the business and activities in which the company may engage: s125 (2). For example, BHO Limited’s object clause is :

The carrying on in all or any of their respective branches all or any of the trades or businesses of iron or steel makers manufactures smelter or winners or of producers of lead zinc or other metals and the manufacturing or production in connection therewith of any merchantable articles commodities or products. 

 

Legal capacity and powers of a company under section 214 (1) where a company has the legal capacity and powers of an individual, thus able to engage in any business or activity that may acquire and exercise rights in the same way as a human being:

1. issue and cancel shares (n/a to company limited by guarantee)

2. issue debentures (documents acknowledges the indebtedness of the company governed by the law of contract).

3. grant options over unissued shares in the company,

4. distribute any of the company property among members, in kind or otherwise;

5. give security by charging uncalled capital;

6. arrange for the company to be registered or recognised as a body of corporate in any place outside its State or Territory,

7. do anything that is authorised to do by any other law (including the law of a foreign country).

 

S 214 (2) aims to protect outsiders by enabling them to enforce contracts with a company even though the contract involved an abuse or power by the company’s directors or controlling shareholders.

 

Companies registered after June 1998 have 3 options (Section 134):

1. draft own constitution (replaceable rules only apply where constitution is silent)

2. simply adopt (expressly/ impliedly) Replaceable Rules.

3. half constitution/ modified Replaceable Rules (RR will only apply where the constitution is silent)

 

This means that the company does not need a constitution to register a memorandum of association and articles of association. S 135: def of RR, S141 table of RR- a set of basic rules necessary for the internal management of the company- largely mirror the old Articles of Association)

S136: Company may still register a constitution if desired.

Effect of Constitution and RR:

S140: have the effect of a contract between:

1. The co and each member

2. The co and each director and co secretary

3. A member and each other member.. so far as they apply to that person.

However, these are different from normal contract, where members can only enforce provisions which affect them in their capacity as members, directors can only enforce provisions which affect them in their capacity as directors, and co secretary can only enforce provisions which affect them in their capacity as secretary. The court will interpret them according to the rules of construction applicable to contracts generally.

 

Hickman vs Kent Sheepbreeders: H, a member of Kent Association complaining before the court of various irregularities in the affairs of the association. Clause 49 of the Association provided that disputes between its members should be referred to arbitration. The association relied on this clause, sought to prevent H from court proceeding. Astbury J held that by virtue of the statutory contract of s140 (1) (a), clause 49 was binding on H and he was therefore obliged to refer his disputes to an arbitration and observed that:

First, that no article can constitute a contract between the company and a third person and no right merely purporting to be given by an article to a person where a member or not, in a capacity other than that of a member, as for instance as a solicitor, promoter.. can be enforced against the company.

 

Eley vs Positive Security Life Assurance Co: Eley was the drafter of the company’s constitution. He asserted a clause that he was to be the company’s solicitor and only be dismissed by misconduct. However, no separate employment contract was entered into. E also received allotment of shares in consideration of the work he did in forming the company. Subsequently, the co ceased to employ him, E brought an action, but failed:

1. The court held that the statutory contract is deemed contract only as between the parties referred in the section.

2. To the extent that s140 confers rights or obligations on a member, it does so only if the person is a member and only in the capacity as a member. Thus applications for memberships may be unable to enforce the statutory contract until they are registered as members.

3. The member is entitled and bound only in its capacity as a member, for example if a provision of a company’s internal governance rules purported to impose some obligation on a person in their capacity as an employee of the company and that person also happened to be the member of the company, the company could not use the person’s status as a member to enforce the internal governance rules under sec 140 against them in their capacity as employees.

4. A member cannot enforce compliance by the company with a procedural requirement in the internal governance rules where failure to comply with can validly be excused by a majority of members in general meeting.

5. Sec 140 would not appear to extend so far as to enable a member to sue to enforce every provision of the internal governance rules.

 

Allen vs Gold Reef: The position is different if the director has entered into a separate contract with the company. The company cannot avoid its contractual obligations by altering its constitution.

 

Thus one problem arises: conflict between separate employment contracts and Replaceable Rules.

 

Alteration of Constitution:

S 136 (5) Public companies that amend or repeal their constitution must give notice to ASIC

S 136 (2) need of a special resolution

S 9:

- 21 days notice of meeting (s249l (c))

- 75% of votes cast

 

S 136 (3) (4) company can add extra requirements (sometimes a further requirement must be satisfied before a resolution takes effect, the members may agree that amendments to the constitution require the written consent of all the members. If such a requirement were included in the constitution, any purported amendment to the constitution by special resolution would not take effect unless that additional requirement was satisfied.)

 

 

          Limitation on power to alter constitution:

          S 140 (2)

          Members must agree in writing:

§         to take more shares,

§         which increases their ability to the company,

§         which increases or imposes restrictions on their right to transfer

 

Doctrine of fraud on the minority

1.      Identify the amendment

2.      Apply the Gambotto’s rules

 

If the voting power of the majority is exercised in fraud on the minority, a minority shareholder may apply to the court for the majority decision to be set aside. In Gambotto vs WCP Ltd, the amendment that:

Any shareholder entitled to more than 90% of issued shares could compulsorily acquire the other issued shares for $ 1.80 per share (par value was $ 1.36).

         

The minority shareholder did not want to sell their shares and they sought to have the amendment set aside on the basis of fraud on the minority. The court held that the amendment was not valid, it was a fraud on the minority: their power to alter articles should not be exercised simply for the purpose of securing some personal gain which does not arise out of the contemplated objects of the power. An expropriation to secure taxation and administrative advantage for the majority of shareholders was not a proper purpose in relation to the expropriation of Gambotto’s shares. 2 tests: “fraud on the minority” can be in 2 categories: 1. those which amounted to an expropriation of shares and 2. all other amendments. 

 

Expropriation amendments must be for (a) a proper purpose and (b) fair:

          “Proper purpose” – save the company from harm and detriment,

“Fairness” concerned with the price to be paid to the expropriated shareholders. If the price is less than the market price, then it is unfair. A fair price should take into account factors such as assets, market value, dividends and the nature of the corporation and its likely future, procedural fairness and actual fairness. Thus:

..alteration.. would be regarded as valid unless it was passed fraudently, oppressively, or was so extravagant that no reasonable person could believe that it was for the benefit of the company.

S 232-234

 

CONSEQUENCES NOT OBSERVING THE INTERNAL GOVERNING RULES

The followings may result:

1. In the case of non-compliance by the company, a member may be able to obtain a declaration or injunction requiring the company to comply, provided the rule is one that a member can enforce on the principles set out above. A director or the company secretary may also be able to enforce the internal governance rules on this basis.

2. In the case of non-compliance by a member, another member or the company may be able to obtain declaratory or injunctive relief or damages.

3. In the case of non-compliance by a director or secretary, the company may be able to obtain declaratory or injunctive relief or damages.

4. Participants that caused the company to breach its constitution may be liable to the other participants in the company.

 

COMPANIES AND OUTSIDERS

2 Ways a company can enter into a contract by:

1. Through the “directing mind and will” of the company (direct way of making a contract),

2. Through an agent of the company (indirect way of making a contract).

 

Directing mind and will of the company:

Certain persons are seen to be the “personification” or embodiment of the company so that when they act, their acts are seen to be the acts of the company itself. These are generally, the board of directors and the general meeting who can pass a special resolution when carrying our actions within the ambit of their powers but not just limited to them. Also there are individuals who are so high up in the management of the company that they may be regarded as the directing mind and will. An employee who follows instructions is not likely to be directors of the will, while people who give instructions are likely to be the directing of the mind and will of the company. In Tesco and HL Bolton, to determine who responsible is a matter of a factual question and we must look at decision making/ power division of the company: constitution and or informal practices.

 

Contracting through an agent:

3 things to looked at:

1. Is that person an agent of the company?

2. What authority has that person been given?

3. Is the act of the agent within the authority given to the agent?

 

To determine whether someone has been appointed co agent and what their powers are, 3 alternatives (one is enough):

1. Actual authority (2 types):

   1. Express actual authority only someone who is the directing mind and will can confer this such as the Board of Directors appointed a person to have instructions.

   2. Implied actual conduct of the authority and all the surrounding circumstances. The court will look at the intention of the Board to give the agent the authority but did not set it out expressly.

Where the authority of an agent is implied from the conduct of the parties and all of the surrounding circumstances for example being appointed to a position in a company.

2. Apparent/ ostensible authority

Where an agent appears to have authority to a third party, the company will be bound by the acts of the agent

 

ELEMENTS:

1.      The company represents that X has authority to make a contract;

2.      Third party relies on the company’s representation and

3.      Third party enters contract with X who is purportedly acting on company’s behalf.

 

THEN:

If the elements are satisfied, the company estopped from denying X is its agent and X has apparent authority to make contract on the company’s behalf.

 

The representation:

1.      Must be made either by:

§         person who is the directing mind and will or

§         someone with actual authority from directing mind and will to make the representation

2.      Can be either:

-          Express or

-          Implied:

                                                                          i.      Where a  company permits a person to act in a certain way; or

                                                                         ii.      Where a company appoints someone to a position that normally carries with it powers to make such contracts.

1.      Northside Developments: directors

2.      Hely Hucthinson: chairman of directors

3.      Panorama Developments: managing director

 

3.      Statutory authority:

S 128-129 of Corps Law

S 129 (3):

If you search company documents and see person X has been appointed to a certain position, you are entitled to assume:

a.      They have been properly appointed, and

b.      They have all of the usual authority and power of a person in that position (outsiders’ point of view.)

 

4.      Problems/ limitations for third parties:

Not every third party is entitled to rely on the statutory assumptions, if they have actual knowledge or if they are suspicious its not true, etc.

 

DECISION MAKING AND MANAGEMENT OF COMPANIES

Managing companies is about making decisions. After registration and while the company is solvent and operating normally, responsibility for making those decisions will be shared between the board of directors (as the primary organ of management of the company) and the members. In larger companies, the directors may delegate some of their decision making powers to other officers of the company.

 

There are four important principles about the management structure of companies by Ford’s Principles of Corporations Law about the organic theory of company:

1. The board of directors and the members in general meeting is each an organ of the company,

2. Each organ of the company has the power to make particular decisions. Each is sovereign with respect to those decisions; in other words neither one has to follow the instructions of the other and neither can usurp the decision-making power of the other.

3. The respective powers of each organ of the company are determined by the law and the company’s internal governance rules.

4. That power is a power to at as the company (and therefore bind the company or to delegate the power.)

The management powers of the board

S 198 A (1) “the business of company is to be managed by or under the direction of the directors. “

S198 A (2) “ the directors may exercise all the powers of the company except any powers that the Corporations Act or the company’s constitution (if any) requires the company to exercise in general meeting. 

 

General laws about where members cannot override decisions of the board:

Automatic Self-Cleaning Filter Syndicate vs Cunninghame

In this case, the directors did not believe that the sale was in the best interests of the company and resisted it. The court found in favour of the directors, holding that a decision whether to sell the company’s assets and undertaking was a management decision that, on the terms of the company’s internal governance rules, was within the power of the board of directors. On the proper construction of the relevant internal governance rule, the members could not by ordinary resolution substitute their own judgment for that of the directors.

 

Johns Shaw & sons vs Shaw

The majority of the board of directors of the company resolved that the company should commence litigation against certain other directors to recover debts owed to the company. The members in general meeting at the instigation of the defendant directors, resolved that the litigation be withdrawn. The court decided that (Greer LJ):

A company is an entity distinct… from its shareholders and its directors. Some of its powers may, according to its [internal governance rules] be exercised by the directors, certain other powers may be reserved to the shareholders in the general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of powers vested by the internal governance riles or if opportunity arises under the internal governance rules, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers vested by the internal governance rules in the general body of shareholders.

 

Howard Smith Ltd vs Ampol

The Privy Council noted that “directors” within their management powers may make decisions against the wishes of the majority of shareholders and the majority of shareholders cannot control them in the exercise of these powers while they remain in office.

 

OPTIONS AVAILABLE TO MEMBERS WHO DISAGREE WITH DECISIONS OF THE BOARD

·         Members have the option of removing directors from office, where they have power to appoint new directors, to replace them with directors who are amendable to the members’ wishes.

·         Members may be able to alter the company’s internal governance rules to restrict the directors’ power to act without first obtaining members consent. Such a course would be effective only with respect to future actions and could not be used to reverse earlier decisions taken by the board.

·         Decisions reserved to members:

1.      Where the board of directors is unable to act; the courts have recognised decisions made by the members in general meeting concerning those matters as decisions made by the members in general meeting concerning those matters as valid. For example deadlocked, shareholders had ordinary powers of appointing directors, directors cannot vote on a matter in which they have a personal interest.

2.      To commence and prosecute legal proceedings where the alleged wrongdoers control the company, members in general meeting cannot substitute their decision for that of the board, but a member may be able to bring a derivative action on behalf of the company in certain circumstances.

3.      To ratify directors’ acts: members have the power to make a decision that the company will not commence legal proceedings against a wrongdoing director.

 

On what issues do members have a vote?

Typically, members may have a right to vote on certain decisions relating to the structure or constitution of the company, including:

-          adoption of and amendment to the internal governance rules;

-          changes of company name and type;

-          variations of class rights; and

-          certain transaction affecting share capital such as selective buy-backs and reduction of capital.

 

Members may also have a say in the composition of the board and the choice of company auditor- this may include a right to vote on:

-          the appointment and removal of directors;

-          certain of the directors’ remuneration and benefits; and

-          the appointment and removal of the company’s auditors.

 

In certain companies, members may have the right to veto some transactions. This means that the transaction cannot proceed unless the members approve it. These include:

-          related party transactions by public companies and their controlled entities;

-          certain significant commercial transactions by listed companies (such as sale of the company’s main undertaking); and

-          certain takeovers and reconstructions.

 

Finally, members can use their voting rights:

-          to initiate a member’s voluntary winding up;

-          under general law to pass resolutions where the board is unable to act or to ratify the breach of directors’ duties- members may be able to excuse of condone a breach of duty owed by a director to the company.

 

CORPORATE GOVERNANCE

Corporate governance is about protecting the interests of stakeholders by setting up the appropriate mechanisms to align these divergent interests where possible and to ensure adequate monitoring of management.  It is concerned with the way in which companies are directed and controlled in which a company’s internal arrangements combined with external factors such as legal requirements or commercial market pressures, provide:

1.      For responsibility for decision-making to be divided between the company’s members, its board and its executive management;

2.      For decisions to be taken and implemented;

3.      For the exercise by decision makers of their powers to be monitored and reviewed;

4.      Incentives for decision makers to act in the interests of the company and disincentives to act in a manner that harms the company.

List of Corporate Governance matters (the reporting obligation) must include matters such as:

1. Composition of the board, including whether the chairperson and other directors are executive or non executive directors;

2. Procedures for selection of new directors and criterion for board membership;

3. Access of directors to independent advice at the company’s expense;

4. Arrangements for setting and reviewing remuneration of directors and managers;

5. Arrangements relating to selection of the auditor and reviewing audit arrangements,

6. Procedures for identifying and managing business risk; and

7. Establishment and maintenance of appropriate ethical standards.

Mechanisms that play a role in corporate governance:

-          directors and officers legal duties

-          the structure of the board

-          auditors

-          institutional investors;

-          takeovers,

-          disclosure of information by companies

-          the product market in which the company operates;

-          the capital market;

-          the labour market for managers;

-          executive remuneration;

-          Shareholdings by managers/directors,

-          Ownership concentration

-          Corporate financial policy;

-          Member voting;

-          Litigation by members;

-          Intervention by regulators

Role of Company’s Officers:

Board of directors: “To appoint and reward the company’s chief executive (the managing director), to set goals, formulate strategies and approve business plans for the company, to monitor management performance and business result, to set and review policies for these shareholders communication and approve reports to shareholders and to set and review budgetary control and conformance strategies.”

Managing directors: “to deal with everyday matters to supervise daily running of the company, to supervise the other managers and indeed, generally be in charge of the business of the company.”

Secretary: “responsible for all the record-keeping within a company such as the registers required by the Corps Act and minutes of meetings of directors and members. Notices of directors’ meetings and of meetings of members are sent out by the secretary.. authorised to attest the affixing of the company seal (if any) to documents.” The Secretary is a person also primarily responsible for ensuring that the company meets its obligations in relation to its registered office and for providing the required information about the company’s officers to the ASIC.

 

TAKEOVERS
Takeover and the important provisions dealing with beneficial and substantial shareholdings.
 

IMPORTANT SECTIONS IN THIS CHAPTER
Section 615 Restrictions on acquisitions
Section 616 Takeover schemes
Section 617 Takeover announcements
Section 618 "Creeping" takeover
Section 741 Powers of court with respect to defaulting substantial
Shareholders
Section 707 Companies in relation to which Part applies
Section 708 Substantial shareholdings and substantial shareholders
Section 709 Substantial shareholder to notify company of interests
Section 710 Substantial shareholder to notify company of changes in
Interests
Section.711 Person who ceases to be a substantial shareholder to notify
Company
Section 712 References to operation of Division 5 of Part 1.2
Section 713 Copy of notice to be served on securities exchanges
Section 714 Commission may extend period for giving notice under this Part
Section 715 Effect of actions under this Part
Section 716 Civil remedy where Part contravened
Section 717 Definitions
Section 718 Primary notice
Section 719 Secondary notice
Section 719A Withdrawal of request under subsection 718(2)
Section 720 Commission may provide information obtained pursuant
to a notice
Section 721 Request by person to whom notice given
Section 722 Compliance with notices
Section 723 Consequences of Commission's decision on a request
Section 725 No notice of rights
Section 726 Civil liability
Section 727 Exceptions to criminal or civil liability
Section 1096A Notices relating the share ownership
 

Substantial Shareholdings

-         Part 6.7 of the Corporations Law is aimed at companies and private individuals making a public disclosure when they become a substantial shareholder in a company listed on a stock exchange (S.85A & 707).

-         Section 708: A person becomes a substantial shareholder when that person becomes entitled to 5% of the voting shares in a company listed on the stock exchange.

-         Section 609: Shares to which a person is entitled includes shares in which that person has a relevant interest and shares in which an associate has a relevant interest.

-         Section 709: When a person becomes aware of being a substantial shareholder they must give the company written notice within two business days of becoming a substantial shareholder.

-         Section 711: When a person ceases to be a substantial shareholder, a notice in writing to that effect must be sent to the company within two business days.

-         Section 713: In order to keep the market informed of large movements in the company's shares any notice given under Sections 709, 710 and 711 must be served on the home stock exchange of the company.

-         If the provisions of section 709, 710 and 711 are not complied with the Court can make an order under Section 741. In this context see also section 613.

 

Beneficial Ownership of Shares in a Non Listed Company

-         Section 208 provides that a shareholder of an unlisted company must disclose to the company that shares are being held in a non beneficial capacity.

-         A shareholder is expected on registration of his or her shares to disclose to the company that the shares are to be held non beneficially. (S.208(l)).

 

Beneficial Ownership of Shares in a Listed Company

-         Part 6.8 of the Corporations Law gives the power to a listed company, and the ASC to issue notices which may be served on shareholders requiring them to make certain disclosures about the ownership of the shares (voting shares).   A shareholder may request the company to issue such notices. (See S.718).

-         The aim of the provision is to provide an open and informed market for the shares in public companies. (See Re North Broken Hill Holdings Ltd (1986) 4 ACLC 131)).

-         In the first instance a "primary notice" is sent to the holder of the shares asking them within 2 business days to supply such information as, full particulars of the shareholder's relevant interest in the shares and asks the shareholder to disclose full particulars of every other person who has relevant interest in the shares or who has given the shareholder "relevant instructions" in relation to the shares (S.7'17 and S.718).

-         See sections 31, 32 for the meaning of "relevant interest in shares".

-         When it is disclosed by the shareholder that another person has a "relevant interest" or has given "relevant instructions" in relation to the shares a "secondary notice" may be given to that person asking them to disclose full particulars of that person's "relevant interest" as well as particulars of any other person known to have a "relevant interest" or who has given "relevant instructions" (S.719).

In ASC v Bank Leumi the-Israel (Switzerland) (1996) 14 ACLC1576, Two Swiss companies were the beneficial owners of shares in an Australian company. Secondary beneficial ownership notices were sent to them by the ASC requesting them to notify the ASC of any relevant interests that other persons might have in the shares. The Swiss companies claimed that they could not give any of the information because of Swiss laws.

The Federal Court (single Judge) refused to order the Swiss companies to comply with the secondary notices or to vest the shares in the ASC. The Judge ordered the Swiss companies to sell the shares on the open market.

The ASC appealed and argued that there should be an order requiring the Swiss companies to comply with the notices and an order vesting the proceeds in the ASC until the notices were complied with. The appeal was dismissed and the Full Court declined to interfere with the decision which meant that the true identity of the shareholders represented by the Swiss companies was not revealed. However the following statements of principle were made by the Court;

-         The Court can make an order requiring compliance with a secondary notice/ an order requiring the sale of the shares and the freezing of proceeds pending compliance; however this cannot be done until a secondary notice is complied with,

-         A secondary notice may validly be given to a person that infringes the law of another country.

-         Secondary notices will continue to be sent until the ultimate beneficial owner of the shares is determined i.e. when the response to the notice is that there is no other relevant interest or relevant instructions being given in relation to the shares.

-         A civil remedy is available to a person who has suffered loss as a result of a failure to comply with the notices (S.726).

-         The Court has very powerful remedies to call on when beneficial ownership of shares has not been disclosed (S.742, S.744 and S.613 and CrosleyLtd v North Broken Hill Holdings Ltd (1986) 4 ACLC 432) 

-         Chapter 6 of the Corporation Law deals with takeovers.

-         Some of the aims of the takeovers provisions are to;

o        to provide a competitive but informed market;

o        ensure all members of the takeover target are supplied with sufficient information to assess the offer;

o        to ensure the directors do not use their managerial powers to deny the members an adequate opportunity to consider the offer;

o        to ensure the premium for control of the target company is shared by all members.

-         The impact and importance of this area of the Corporations Law lies in its application to listed companies.

 

Some Important Provisions in Chapter 6

-         Section 615: this is probably the most important provision because it prohibits a person from taking more than 20 percent of the voting shares in a company (prescribed percentage). Once the 20 percent threshold is reached a person may only acquire shares as permitted by chapter 6.

-         Section 616: Takeover Schemes - This section permits acquisitions beyond the threshold which take place as a result of a formal offer under a takeover scheme. Takeover schemes are regulated by chapter 6 and are called 'Tart A Offers". The offer must be to each person holding shares in the class of shares being acquired. Once the formal offer is made the bidder is also entitled to acquire shares on the stock exchange. The target company responds to the Part "A" statement by the issue of a Part "B" statement which usually contains the directors' recommendations concerning the offer.

-         Section 617: Takeover Announcement- is another method where the 20 percent threshold can be passed without breaching chapter 6. This is known as a "takeover announcement", it is also known as a Part "C" offer. It takes the form of the bidder making an unconditional offer to buy all shares offered on the stock exchange for one month at a specified price. The offeror must pay cash for all shares offered for sale. Monthly extensions are permitted up to a maximum total of 6 months.

-         Section 618: "Creeping" Takeovers - This section permits a shareholder with 19 percent of a company's voting shares to increase that shareholding by acquiring an additional 3 percent each 6 months.

Some Defensive Strategies

• Issue of dividends or bonus shares. This may be done by the company to secure shareholder loyalty. It is not generally in breach of any provision.
• Revaluation of assets and profit forecasts. This would be done to draw out a higher bid from the offeror. In itself this would not be in breach of any section unless it amounted to misleading, deceptive or false statements.
• Service Agreements. A generous service contract could be entered into by the target company with one of its senior executives. This would be done to deter the offeror by giving it the option of working with existing management which might not be attractive or buying out the contract.