#7410 - Further Consideration Of Theoretical Readings - Business Associations I

Class 9: Further Consideration of Theoretical Readings (Classes 6 & 8) and Discussion of Essay Topics and Problem Questions.

This class is your opportunity to get early in semester feed-back (or perhaps more accurately ‘feed-forward’) for the quiz and your essay.

Reading: Complete your reading of the materials from Classes 6 & 8. We will complete our theoretical discussion by applying the theoretical ideas to some of the legal doctrines you have already learned and some you will encounter in the rest of the course (approx 1 hour).

Come to this class with a synopsis of your essay complete. We will discuss likely lines of argument and approaches to the essay topics to help you perfect your synopsis.

A practical structure for the synopsis might be:

1. The question;

2. 100 word abstract/summary of the central argument;

3. a discussion of background showing what makes the question significant;

4. discussion of about 2-3 issues or aspects which elaborate the answer to the question and possible conclusions;

5. a list of a dozen or so books, articles, policy papers etc which have been consulted and which are likely to be relied on in the essay, and your reasons for adopting these works.

This should all fit on 2 sides of an A4 page – and remember, you only have 2,000 words so keep it focused on the question (approx 30 mins).

Directors:

• Cassandra, Betta, Katie, Rohan, Lochie

• And Winsome who owns the majority of the shares.

You should also consider the following problem question for the class and attend with roughly sketched out answer (approx 30 mins):

1. Lasar Pty Ltd (Lasar) is a company incorporated in 2007. The share capital of the company is $75,000 divided into 60,000 $1 ordinary shares and 15,000 preference shares. All shares have one vote. The constitution provides that no allotment of shares may be made without the consent of Cassandra, the managing director. The other directors are Betta, Katie, Winsome, Rohan and Lochie. The constitution is otherwise identical to the replaceable rules.

In 2009 a meeting of directors is held. At the meeting it is proposed that the company allot a further 10,000 preference shares to ordinary shareholders. Four of the directors agree with this proposal; however, Cassandra will not give her consent. The board also considers whether to begin proceedings against two of its directors, Betta and Katy. Winsome who owns the majority of the shares in the company claims that Betta and Katy have debts outstanding to the company totaling $500,000. Five of the directors, including Betta and Katy, vote against the company commencing such proceedings.

Winsome says that both the issues should be considered by the general meeting and decides to convene a general meeting to pass ordinary resolutions authorizing the company to allot 10,000 preference shares to ordinary shareholders and to commence proceedings for the recovery of the debts owing to the company be Betta and Katy.

Fourteen days notice of the general meeting was given and the notice was given to all shareholders. At the general meeting the resolutions were passed.

Leila, a preference shareholder with 10,000 shares, and Betta and Katy wish to challenge the resolutions and seek your advice. Advise them on their rights and what practical corporate steps they may take to deal with the general meeting resolutions. You need not consider shareholder actions and other shareholder remedies at this stage.

Question?

• Look at the argument and be able to condense in 100 words. What makes the question significant? Is the law in action bad or the law on the page bad? Page on how to write for BA in your book. Why do we care about corporate power? It will be enough to pick out 2-3 main issues to think about. You must give succinct account of Australian law including statutory provisions. You must know the detail of the law to write theory in detail and be able to comment on theoretical opinions. To start the essay write a short succinct account of the law in the area. Organise the essay so it sets out the law first and then have a critique or take three big issues that the law in your sections raises and then think about those issues theoretically and critically. You must have theory, law thread and critical thread. The theory part is very important. Do not leave it out. You must read and think and reflect on theory. We want to know if the law is effective at doing what we want to do.

• Modern law review in library.

• Essay so set out argument and what you are going to say in your introduction.

• The most sophisticated essay is to write the theory and then critique the theory and use the theory as a bench mark then see the whole essay. Hard to integrate. Need to find all the issues.

• SO set out the essay by theories- essential issues and use the theory as a bench mark then critique it. You want to know what in essence the law is trying to achieve and how effective it is. Have strong argument in intro and set out what you are going to say.

• What are Leila (preference shareholder) and the directors Betta and Katy’s rights?

• Can they challenge the allotment of 10,000 preference shares after a resolution has been passed by the GM?

• Can the directors prevent being sued for the outstanding debts if the directors voted against the resolution but the shareholders did not vote against the resolution?

• What sort of Company is it?

  • Public incorporated company. Comes under CA and the ASX listing rules. It has a constitution. Not a private company- its harder to change constitution in a public company than it is in a private company.

• What is the shareholding?

  • 60,000 $1 ordinary shares.

  • 15,000 preference shares.

  • Winsome is majority shareholder. E.g. 40,000 shares, 5000 preference shares.

  • Leila owns 10,000 preference shares. Not a director.

• Who are the directors?

  • Winsome* (majority shareholder and a director)- Can he convene a GM after resolution is vetoed? What provision allowed Cassandra to veto in the CA- the power to change the constitution is in s136- allows you to change the terms of the constitution and entrench. They would have to change the constitution to prevent this

  • Cassandra. Managing director but not a shareholder as far as we know. No allotment of shares can be made without her consent- veto on board’s share issue power. This would be in the constitution. You would need a resolution to change it (need 75% and follow 249L to go through resolution and give appropriate information- notice of meeting and formalities- Marra Developments- there is higher significance in the resolution if they are to do with director rights. To remove directors you only need a normal resolution- 50%).

  • Betta

  • Katie

  • Rohan

  • Lochie

• Which corporate organs act?

  • The board decides to issue 10,000 preference shares to ordinary shareholders. 4 of them agree with the proposal out of 6. It would have been valid but for Cassandra not agreeing- constitutional over-ride which Cassandra has. Position of stale mate. Is the issue of the preference shares- is the board the proper organ for making the decision? Yes.

  • Legal proceedings against two directors. Is the board the right organ to decide this? The company is the proper plaintiff but it can only act through the board or GM. It’s not in the GM power to decide this. Part of management of the board to decide under 198A(1).

• What do they do? Is it legally valid?

• Who are you asked to advise?

• What advice (legal/corporate practice) are you asked for?

Summary of argument:

• Section 298H requires 21 days notice not 14. To have 14 days notice 95% of the shareholders have to agree to holding it sooner. Otherwise the Director that called the meeting may be removed under section 203D and a new one appointed. 249J requires this notice to be written. If it is a listed company 28 days notice must be given under section 249H. It is a listed company so 249H applies. Effectively notice can be overlooked.

• S198A(1) puts the management of the company in the hands of the directors. 198A(2) says that where they have no power in the act to do something then all the rest of the powers are with the board.

• The shareholder can sue but the resolution was passed by a majority of shareholders so there is not much they can do. Unless they show not enough notice was given and therefore the resolution failed to be effective.

  • Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No4) (1988) Where the directors diminish a shareholder’s voting power by an improper allotment of shares, the wrong is committed against the SH personally. A SH’s voting power is a fundamental attribute of company membership therefore a SH should be able to protect it by personal legal action against the directors. The right is founded in equity.

• Was it a valid board meeting? Resolutions can be passed if there are a majority of director votes under section 248G(1). 51% of votes for ordinary resolution and 75% for special resolution. 5 out of 6 directors voted not to have the resolution- this is more than 75%. BUT Katy and Betta should not have voted because they had a conflict of interest- they were thinking in their best interests and not in the best interests of the company. Yet if they disclose their conflict of interest, which the board was probably aware of because it was very obvious they had a conflict of interest, then with the board’s consent they will be allowed to vote. S191 requires the director to disclose any personal interest and must give notice. The provisions in the statute are s191-195 for what directors have to do to disclose a conflict of interest. We don’t know if...