law 2460 week 8s 2011

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Investment in share capital

Dividend policy

shareholder remedies

Corporate GovernanceDirectors duties

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Characteristics of a Company

upon incorporation, a company:

Has separate legal personality

has perpetual succession

has power to hold property

is capable of suing and being sued is capable of exercising all the functions of an incorporated

company (this includes the power to issueshares/debentures)

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Lifting the Corporate Veil

The law may ignore the separate legal personality of acompany and look to members or controllers for liability

By statute,eg:

- officers liable for co. debts where no reasonable

expectation of debts being paid - where business carried on with intent to defraud creditors,

individual personally liable

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Classification of Companies

Companies are classified according to:

the liability of members

Proprietary and Public

Holding and subsidiary Co

Recognised foreign companies

Trustee Co

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Co.s own liability is never limited, however members

liability arises on companys liquidation

the liability of members:

Limited by shares ( liability limited to amount of $ unpaid onthe shares) P/P (Ltd)

Limited by guarantee ( liability limited to amount of $members agree to pay on winding up) Public

Unlimited co ( no limit on members liability) P/P

No liability Co( mining Co- NL) Public

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Proprietary and Public

Public-1. all companies not proprietary2. at least 3 directors / AGM/ auditors3. Listed or unlisted

4. greater statutory duties than proprietary companies

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Proprietary and PublicProp- s.113

1. limited by shares (Pty Ltd) up to 50 shareholders2. must not engage in Ch 6D activities3. S.45A distinguishes between small and large prop co4. small Pty: gross Y less than $10m, assets

less than $5m, max 50 employees

6. Public and large pty must have financialreports and auditing, and sent to members and ASIC

7. All prop restrict right to transfer shares8. prohibit any invitation to the public to subscribe for any

shares in or debentures of the company or to depositmoney with it

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holding, subsidiary,groups of companies and relatedcompanies:

Note :holding Co* not defined in Act but subsidiary definedin s.46

A Co is a subsidiary if another co:

Controls composition of Board of Directorscontrols more than half the votes at general meeting

holds more than half the shares in subsidiary

Recognised foreign companies:

Must be registered with ASIC s.601CD

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Company Constitution

Constitution ( or replacement rules)( 140(1))

defines the objects and powers of the company

regulates the operations and internal management of thecompany

document must be lodged with ASIC

is a contract between the Co and each member between members

between members and Co Director/Co Secretary

Note: memorandum and articles

Note: Ultra Vires- under this doctrine any acts by the Cooutside its Constitution was void- rule abolished by S.124

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Co.s Constitution(s 140(1))

sets out

(a) the name of the co.

(b) the objects of the co.

(c) a share capital clause

(d) a liability clause(e) a subscriber clause:

are ap ta

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are ap ta

Share the interest of a shareholder in the company

measured by a sum of money, for the purpose of liability inthe first place, and of interest in the second, consisting alsoof a series of mutual covenants entered into by all theshareholders

Company raises the initial capital or further capital(investment) by way of an issue of shares

Shares shall be a moveable property, thus indicating that ashareholder may do what he likes with them; sell them,give them away or pledge them as security or a loan.

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Share Capital

Authorised capital -the amount of authorised capitalwhich the company intends to register and must be statedin constitution-comprises par value shares that have been/will be allotted.** This requirement is no longer necessaryafter 1998 amendments(254C)

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Types of shares 1) ordinary shares ( any share that is not a preference

share). Rights attaching to these shares are a) toparticipate in the surplus profits of the co through dividenddistribution b) return of capital in the event of winding upcompany c) full voting rights at general meetings (usually)

2)Preference shares- two types a) non voting preference

shares b) preference shares with voting and participationrights*

Preference shares usually entitle the holder to a fixed andcumulative dividend which is payable out of profits in

priority over dividends on ordinary shares and to a returnof capital.

f

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Preference shares text:7.20.50

Preference shares are issued as a source of flexiblecapital, the holder may not have right to vote, or participatebeyond specified amounts in any distribution or winding up

Cumulative/non cumulative preference shares- cumulativepreference shares: fixed rate of dividend through out thelife of the company. Non cumulative preference shares:

fixed rate only in those years where profits enable adividend to be paid.Redeemable preference shares:a) shareholder has the right

to be repaid capital contributions at a specified rate orcompany can repay at specified time.** reduction of capital,

insolvent tradingOther types of shares: a) non voting or restricted votingshares and employees shares

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Dividend Policy

Matter for the Directors only

Must be paid out of profit, s 254T( not capital) as the capitaof the company must be maintained to protect creditors

Before a dividend can be paid it must be declared, s 254U

In public company, recommended but declared at the AGM

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Fundraising/capital raising-

the procedure that occurs when a public companyissues shares, debentures, legal and equitable interestsand options.(s.9 , 761a & 700(4))

Applicable law ch 6D

Most fundraising involves shares rather than

debentures as there is a more complex procedure forissuing debentures, not only are disclosure docsrequired but a trust structure must be established tohold the security

Sale of existing shares generally not subject to Ch 6D

F d i i d I t P t ti

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Fundraising and InvestorProtection Disclosure documents - information that must be

supplied/ disclosed when fundraising

Disclosure documents include a) prospectus, b) shortform prospectus, c) profile statement, d) offer informationstatement.

The general rule is that there should be disclosure of allinformation that Investors and their professional advisorsneed to make an informed decision. s.710

Major issue: forecasting

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Investor Protection

Disclosure docs not required:

Excluded investment, s 708: 12 mths/20 Investors(personal offering)

raising max of $2m rule ( small scale);

$500,000 minimum investment or $2.5m net assets andgross income over $250,000; (sophisticated investors)

or through a licensed dealer to professional investors orexecutive officers of company.

Misrepresentations and Omissions Pt 6D 3

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Misrepresentations and Omissions-Pt 6D.3 Stop orders s.728- persons prohibited from offering

securities after finding out that the disclosure doc is

incorrect through fact or omission or where new informationhas arisen that is adverse to investors. ASIC may issue aStop Order on the disclosure document in thesecircumstances.

Supplementary material or replacement documents may be

lodged to correct deficiencies in original disclosures. S.719 Contravention of s.728 is a criminal offence and s.729provides for compensation if loss is suffered..

The TPA ( S.52) cannot be used to commence an action inrelation to disclosure docs.

Liability offences

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Liability-offences

S.726- offering securities in a non existent body S.727- offering securities without current disclosure doc

S. 728(1)- misleading and deceptive statements,omissions, new matters..

S. 728(2)- (1) is breached if there are no reasonablegrounds for making that statement.

If S. 728(1) contravened then s.729 provides forcompensation S.729(1) claimants must prove damage results from the

deceptive or misleading statement and s.729 sets a list ofwho may be liable- incl offeror, directors of body making

offer, persons named in the document with their consent asproposed director, underwriters, persons named in thedocument who with their consent have made statementsincluded in the document

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Corporate Governance

The term corporate governance refers to structures

and procedures within a company that ensureappropriate standards of corporate behaviour andaccountability-

the emphasis is on self regulation

corp. governance has the purpose of monitoringand controlling the management of corp so as toprovide more effective management and to improveshareholder value

the emphasis on corp gov reflects the investorsdemands that corp improve their internal structureswhich ultimately may improve investor returns.

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Corporate Governance & Directors duties corporate governance is a relatively new term and is based

primarily, but not only on Directors and company officersduties.

Duties are categorised as

1) statutory duties (ss 180,181,182,183,191)

2)Fiduciary & common law duties3)ASX Listing rules,

4)Codes

There is substantial overlap between these categories of

duties. t

t t t d ti

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statutory duties

S.180- directors and officers have a duty to exercise areasonable degree of care and diligence- defence 'business judgement rule

S.181-duty to act in good faith in the best interests of theCo and for a proper purpose

S.182-improper use of position

S.183- improper use of information that is gained in theirposition within Co

Ch 2E related party transactions

S.191 directors who have material self interest in a matterbefore the board must disclose this to other directors

Material self interest- s.195

Fiduciary duties

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Fiduciary duties

The word fiduciary refers to a person holding a position

of trust such that he/she is bound in equity not to abusethe trust.

Fiduciary duties require the Director to act bona fide inthe best interest of the company as a whole.. Fiduciary

duties are imposed individually not on the Boardcollectively.

It doesnt matter how wide or extensive the powers given

to the directors in the Co constitution ,the fiduciary powers

remain the same

Fid i d ti

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Fiduciary dutiesThe fiduciary powers are:

1) To act bona fide in the best interests of the company.This duty is also found in legislation

a director shall at all times act honestly and use

reasonable diligence in the discharge of his duties

legislation also provides that an officer shall not make improper use of information gained in his position. The

words honestly and bona fide are interpreted as meaning

what the directors consider is in the best interest of the

company., not necessarily what others or the courtconsiders was in the companys best interests.

Fiduciary duties cont

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Fiduciary duties cont.,

2)Duty to exercise powers for a proper purpose. The courtlooks to the primary or substantial cause of the exerciseof power- if impermissible then the courts will declare theaction void.

3) duty to avoid a conflict of interesta) a director must not use the property or money of thecompany to make a profit for himself

b) director cannot use information gained in his position as

director to make a profit for himself

c) Director cannot make use of his position to obtainprofits for himself or to retain such profits

common law duties

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common law duties

1) duty to use skill in the performance of duties-

2) duty of care: 3) Duty to be diligent A director must exercise

reasonable diligence in the performance of his duties.

REMEDIES for breach : directors may be sued for

damages, profits made by directors may have to behanded to the company.

ASX Listing rules http://www.australian-corporate-

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g p pgovernance.com.au

ASX Corporate Governance Council has set out 10 essentialprinciples with best practice recommendations on how these should

be implementedhttp://www.asx.com.au/supervision/governance

1. lay solid foundations for management and oversight

2. Structure the board to add value

3. promote ethical and responsible decision making4. safeguard integrity in financial reporting

5. Make timely and balanced disclosure

6.Respect the rights of shareholders

7. recognise and manage risk

8. encourage enhanced performance

9. Remunerate fairly and responsibly

10. recognise the legitimate interests of stakeholders

ASX Listing rules

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ASX Listing rules

ASX listing rule 4.10.3 requires listed companies to disclose

in their annual reports the extent to which they havefollowed these 10 principles

Minority shareholders

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Minority shareholders

Shareholders vote for the Directors,

.alteration of the Constitution share capital and variation of rights

of shareholders,

however these matters may lead to minorityshareholder oppression

Investor Remedies

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Investor Remedies

Minority shareholders provided with some protection underthe Co Act..

s 232 oppressive or unfair conduct s 233 Remedies including, winding up of company(s461) Right to inspect the company books, s 247A Injunction, s 1324

Derivative action (investor brings action on behalf of thecompany) s 236 and s 237

Read :Gambottos case

law 2460 week 8s 2011

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