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1

Powers of company to raise money

SECT 124
Legal capacity and powers of a company        (1)  A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to:
                     (a)  issue and cancel shares in the company;
                     (b)  issue debentures (despite any rule of law or equity to the contrary, this power includes a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long);
                     (c)  grant options over unissued shares in the company;
                     (d)  distribute any of the company's property among the members, in kind or otherwise;
                     (e)  give security by charging uncalled capital;
                      (f)  grant a circulating security charge over the company's property;
                     (g)  arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction;
                     (h)  do anything that it is authorised to do by any other law (including a law of a foreign country).

2

Becoming a member

Power of company to issue shares see s 124
On registration of company
Application after registration
(See constitution of company)
Issue of shares (Note difference between issue and sale of shares)
Membership size
s 114 – minimum number of members (i.e. 1 member)
S 113 – maximum for proprietary company is 50
Classes of shares
Ordinary, preference, etc.

3

What is a share s 1070A?

A share, other interest of a member in a company or interest of a person in a registered scheme:
(a)  is personal property; and
(b)  is transferable or transmissible as provided by:
  (i)  the company's, or scheme's, constitution; or
  (ii)  the operating rules of a prescribed CS facility if they are applicable; and
(c)  is capable of devolution by will or by operation of law.

4

s 231 provides a person is a member if they:

are a member on registration of company
agree to become a member after registration of company
becoming a member under s 167 (conversion of company limited by guarantee to limited by shares)

5

Issue: Are there restrictions on becoming a member?

Proprietary companies
s 1072G
Directors may refuse to register a transfer of shares for any reason.
Must prove directors acted in good faith or for proper purpose (Re Smith v Fawcett Ltd (no act of bad faith))
s 1071E must tell person within 2 months of lodgement that registration was refused
s 1071F person can apply to Court to have shares registered
Persons under age of majority
Under 18s can be members (consider tax compliance obligations)

6

Ceasing to be a member

Two ways:
Sell or Transfer (e.g. death, bankruptcy, family law) the shares (note: restriction on transfer; see: s1072G)
Forfeit the shares (see constitution, s 258D)

7

Transfer

Public companies do not have restrictions on transfer of shares
Proprietary companies may do so.
s1070A(1) shares are transferable subject to the company’s constitution. Proprietary companies still have restrictions on transfer of shares
S 1072G the directors of a proprietary company may refuse to register a transfer of shares in the company for any reason.
If a transfer is unregistered then the existing shareholder is still a member

8

Company Register of members

Register of members must be maintained by the company: ss. 168 and 169
Issue: Share certificates v CHESS (ASX transfer system)
Section 176 states that the register of members is proof of the matters shown in it.
Key case: Re Clifton Springs Hotel Ltd.
P made application for shares and sent money to company. His name was entered onto the register but no notice of allotment or acceptance was sent. The company went into liquidation and P was included in lost as contributory.
Held to be a member because his name was on the register.
Company or “aggrieved person” can make application to Court to correct register: ss. 175

9

Membership on behalf of another

Shares can be held by someone else on behalf of another person. Eg death or bankruptcy.
Example from the case study: Investment for Lisa’s family will be in the name of Tiger Lily Investments Pty Ltd.
Trustee does not need to disclose that they hold the shares on trust. However:
Part 6C.1 – substantial holding in listed company require people holding as trustees to disclose who they hold for when they hold more than 5% of the voting shares in a company
Part 6C.2 – tracing notices to ascertain beneficial ownership (listed company or ASIC)
s 1072E(11) – trustee for holding company must disclose to the company within one month

10

Variation of Class Rights

Any change or cancelation of members rights attaching to a class of shares require approval of members whose rights are affected
S 246B deals with variation or cancellation of class rights attaching to shares.
Look at the constitution as it will set out the procedure for varying class rights.
If not in the constitution then look to s 246B(2)
Need special resolution of members affected (75% of the members affected)
Examples:
See s 246C
Shares in a class are further divided and the rights are not the same
Rights of a class are varied

11

Members’ meetings

Recall: Doctrine of separation/division of powers between Directors and Members

3 types of members’ meetings:
- annual general meetings (AGM)
- general meetings
- class meetings

12

Who can convene members’ meetings?

Any director – s 249C and s 249CA;
Board of Directors – the constitution;
Board of Directors – s 249D(1) (at request of 5% of votes or 100 members);
Members under s 249E(1) (if directors do not hold meeting within 21 days of notice then 50% of members can call a meeting);
Members under s 249F (5% of the votes may call a meeting without requesting directors do so)
The Court – s 249G

13

Annual General Meeting

Public Company
A public company must hold first AGM within 18 months of registration. After registration, it must hold AGM at least once every calendar year and within 5 months of year end (s 250N)
Can apply to ASIC for extension of time (s 250P)
Business of AGM (s 250R)
Consideration of the annual financial statements, directors report and auditors report
Election of directors
Appointment of auditor
Directors remuneration report

14

Extraordinary General Meetings

Class Meetings

Any meeting other than AGM is an EGM

A Class Meeting is a meeting of different class of shareholders (Rights of the class of shares holders can only be varied if 75% or more of members agree)

15

Members’ Meeting Requirements

Notice
At least 21 days notice (28 days for a public listed company) to be given or as per constitution (see ss. 249H & 249HA)
Notice can be less than 21 days if approval is given by the shareholders (not for listed companies – s. 249HA)
Notice to be given to each shareholder entitled to vote

Contents
Information is set out in s 249L
Place, date and time
General nature of business
Any special resolutions,
Ability to appoint a proxy

The conduct of meetings – technology
Can hold AGM at 2 or more locations by use of technology (s 249S)

Quorums( s 249T),
Minimum number of shareholders that must be present to make meeting valid
The quorum is set out in the company’s constitution
The quorum must be present at all times during the meeting
If quorum not present within 30 minutes of meeting then meeting is adjourned

Proxies (s 249X and s 250A)
Appointment of proxy to vote on behalf of members who can not attend the meeting
Mandatory rules for a public company
Shareholder can direct how the proxy is to vote
Must be received at least 48 hours before meeting

Chairperson s 249U, s 250S and s 250SA
In charge of the meeting and ensures that the meeting is properly conducted
Directors elect a person to be the chair
Chair has the casting vote
Chair must sign the minutes of the meeting
Chair to allow reasonable time for members to ask questions generally and also about the directors remuneration report

Voting and resolutions (s 250J, s 250K, s 250L)
By show of hands or a poll
Show of hands means each shareholder has one vote
A poll means one vote for each share held
Resolutions passed by show of hands unless poll is demanded
Declaration by chairman that is conclusive evidence of the result of voting by show of hands
Poll can be demanded by at least 5 shareholders or 5% of the votes or the chair

Resolutions
Ordinary resolutions are passed by a majority
Special resolution needs to be passed by at least 75% of votes
Need to also specify that it is a special resolution
For proprietary company it can pass a resolution without general meeting if all shareholders sign a document they are in favour of the resolution This is called a circulating resolution. S 249A(2)
One shareholder companies pass a resolution if the member records the resolution
Where all shareholders entitled to attend and vote agree to a matter that agreement is binding as if it was a resolution passed at a general meeting known as the Duomatic principle

Minutes (s 251A)
Company to keep minute book of all meetings and resolutions passed
Minutes to be recorded within 1 month of meeting and signed by the chair
Minutes to be available for inspection by members at company's registered office

16

Irregularities

Irregularities will not invalidate meetings the unless the court is of the view it will cause an injustice (s 1322(2))
Examples:
No quorum
Lack of notice time
The section allows the court to make orders where the rights of members and creditors are interfered with.
The court will only make an order to invalidate the proceedings.
When there is a substantial injustice which a court order cannot remedy.

17

Other grounds to invalidate meetings

s 1322(3) – failure to give or receive notice;
s 1322(3AA) – inability to access notice;
s 1322(3A) – lack of opportunity to participate;
s 1322(3B) – contravention of voting rights pursuant to s 249D(3)

18

Irregularities: court’s powers

If the Court finds that the irregularity was essentially of a procedural nature, the person(s) concerned acted honestly, or it is just and equitable that and order be made, it has the power to:
(a)  an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
(b)  an order directing the rectification of any register kept by ASIC under this Act;
(c)  an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a)
(d)  an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation …
and may make such consequential or ancillary orders as the Court thinks fit.
(Sections 1322(4) and (5))

Preconditions
- acted honestly;
- just and equitable an order be made;
- no substantial injustice
( s 1322(6)) :

19

Issues affecting the rights of the member:

Contract with the company (s 140(1)(a))
Constitution

20

Purpose of members’ remedies

Members’ remedies are to provide a remedy for unfair treatment.
Examples are:
The controllers (i.e. director(s) or majority members) are harming the company
Directors paid too much in comparison to other directors of companies of similar size
Directors have breached their fiduciary duties but company doesn’t do anything about it
Profits and therefore dividends down significantly
Amend the company constitution which disadvantages the minority

21

Members’ remedies broadly divided into:

The statutory remedies
The derivative action
The personal action conferred under general law
The personal action conferred under the Corporations Act
The personal action under the statutory contracts.

22

Statutory Remedies

The oppression remedy (ss. 232-235)
The winding up of the company (s. 461)
An injunction to prevent breach of Corporations Act (s. 1324)

23

Oppression Remedy (s. 232)

The court can provide a remedy to a member where the court finds that:
The conduct of the company affairs or
Act or proposed act by the company or
Resolution or proposed resolution of members
Is contrary to interest of the members as a whole or oppressive, unfairly prejudicial or unfairly discriminatory against a member
A member or any other person that ASIC thinks appropriate can apply (person bringing the action must be a member at the time action is bought)
Remedy applies to all types of companies but most commonly used remedy for private companies

24

Conduct of the affairs of the company (first limb s. 232)

This includes the conduct of the directors, majority shareholders, substantial shareholders and the company
It also includes activities of the company, the internal management and the powers of the persons

25

Oppression, discrimination (second limb s. 232)

Looks at the nature of the conduct
It is something that is burdensome, harsh, wrongful or an overbearing act or attitude of someone
The test is: It is oppressive or unfair if a reasonable director would not have acted in that way

Key case: Wayde v New South Wales Rugby League Ltd
Removal of club from competition so the number of clubs was 12.
The Court held that although the decision was harsh for the club excluded it was a decision that a reasonable board could have made. And therefore was not oppressive.

26

Examples of oppressive and unfair conduct

Diversion of corporate opportunity

Fexuto Pty Ltd v Bosjnak Holdings Pty Ltd;
Three directors, 2 brothers and wife of decease brother. Two of directors tendered for contract which was won by a company controlled by the 2 directors.
HELD: Oppressive behaviour to deny the company a corporate opportunity
Re Bright Pine Mills Pty Ltd.
Three shareholders, S with 5,500 shares, D with 1,250 shares and another with 250 shares. All three were directors. D voted off the board. A group of S relatives established a business to use the waste from the business which was very profitable. They used the company staff and management. D bought action
HELD: S was doing things to benefit himself and it decreased the value of the assets of the company and the conduct of S was oppressive behaviour to D

Diversion of profits

Shamsallah Holdings Pty v CBD Refrigeration and Airconditioning Services Pty Ltd
Dividends only paid of up to 50% of profits after tax. Policy not reviewed for number of years even though profits had gone up 5 fold.
HELD: failure to review in light of circumstances was oppressive especially when directors increased their own remuneration
Sanford v Sanford Courier Service Pty Ltd
Court ordered the shareholders purchase the shares of S. The majority shareholders had acted oppressively as they excluded S from the profits by diverting business away from the company to another owned and controlled by the majority shareholders
They also took high salaries and benefits for themselves without paying dividends
HELD: Refusal to pay dividends was oppressive conduct.

Directors failure to act in the interest of the company

Re Overton Holdings Pty Ltd;
F the MD of the company and major shareholder arranged for the company to lend money to 2 other companies controlled by him. The company’s other director and minority shareholder did not know.
HELD: F had breached his duty as no commercial benefit to the company in lending the money The conduct was oppressive because the company would not take action against F even though the company had reasonable grounds to do so.

Exclusion from management

If minority member has a reasonable expectation of continued participation in management then removal of the minority member will be oppressive.
Where board meetings are conducted in an unfair manner this can be oppression

Unfairly restricting dividends

Members have a disagreement about the amount of dividends to be paid. Just because a minority member wants higher dividends the decision to adopt a conservative financial policy and not pay high dividends is not oppressive where the policy is agreed to by other members.
If the majority directors deliberately pay low dividends or no dividends by paying themselves as directors higher remuneration then this can be oppression



27

Remedies as result of oppression (s. 233)

Court has the power to order:
Wind up the company
Modify or repeal the constitution
Regulate the conduct of the company in the future
Purchase of shares by other members
Company commence or defend legal actions
Appoint receiver manager
Injunction to restrain person from doing something

28

The winding-up remedy (s. 461(1))


Who may apply?
The member
The grounds for winding-up:
Directors acting for own interest over that of the company (s 461(1)(e))
Affairs of company conducted in an oppressive manner (s 461(1)(f))
Act or omission by the directors is oppressive (s 461(1)(g))
Just and Equitable grounds to wind up company (s 461(1)(k))

29

s 461(1)(k) – just and equitable ground

Examples:
Deadlock
Fraud or misconduct
Failure of substratum (abandoned objects of company) (e.g. re Tivoli Freeholds Ltd – Company not conducting business it should have been)
Breakdown in mutual trust (e.g. Ebrahimi v Westbourne Galleries Ltd)
In the public interest to wind up the company (e.g. mismanagement of the company)

30

The statutory injunction (s. 1324)

The required conduct – s 1324(1)
Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:
(a)  a contravention of this Act; or
(b)  attempting to contravene this Act; or
(c)  aiding, abetting, counselling or procuring a person to contravene this Act; or
(d)  inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or
(e)  being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or
(f)  conspiring with others to contravene this Act;

Applicants
ASIC or
A person whose interests have been or would be affected by the conduct that contravenes the Act
Person includes a creditor and a members
A contravention of the Act is automatically taken to affect the interests of a creditor or member of the company if:
The insolvency causes a breach,
A breach of the share capital requirements re share buy backs, financial assistance, or reduction of share capital.
Court may grant injunction pursuant to: s 1324(2); s 1324(3); s 1324(4); s 1324(6).