Answer 4
1. What type of business structure would you suggest that Scarlett and Essence consider and why?
2. Provide them with advice on the role of replaceable rules and/or a constitution and the ways that a constitution can be adopted and the major limits on the rights to alter a constitution;
3. Provide some advice to Essence about directors meetings. She wonders – does the Corporations Act 2001 (Cth) mandate that their company need to have regular meetings and how can these meetings take place if Scarlett is overseas?
4. Provide some advice to Essence of the likelihood of such a resolution as proposed by Scarlett being successful and if Marigold might have any rights to contest such a resolution should it be passed by the company?
5. Essence does not want this to happen and seeks your advice about the protection that the Corporations Act 2001 (Cth) provides to existing shareholders in respect of a new share issue?
6. Advice Essence if the company or Azalea is liable for any compensation that John might claim as a result of his illness and the time had to take off from work to recover from the food poisoning?
The directors of a company are placed at the apex position in the organizational hierarchy because of the duties and responsibilities they are entrusted with. This poses a situation where they have the liberty to act on behalf of the company however in doing so they are obliged to observe good faith and consider the best interests of the company. Moreover, the shareholders of a company have an obligation to ensure that by virtue of any majority shareholding the rights of the minority shareholders must not be oppressed in any way (Bottomley 2016). The following paragraphs will analyze a factual scenario based on the abovementioned obligations and endeavor to determine the rights of all parties involved in the same.
In the given set of circumstances the company has four share holders and they hold shares in the following proportion:
- Scarlett – 50 shares.
- Essence – 30 shares.
- Marigold – 10 shares.
- Daisy – 10 shares.
The directors have a falling out and Scarlett suggests removal of Marigold as a director and a shareholder of the company. Additionally, Marigold paid $20,000 for her shares however Scarlett suggests that the money should not be returned to her. The issue here is to determine if such a resolution can be refuted.
Corporations functioning within the jurisdiction of Australia are subject to the provisions of the Corporations Act, 2001. As stated in the act a company must have a company constitution or must incorporate the replaceable rules defined in the act into their structural framework. This is stated in Section 135 (2) of the Corporations Act, 2001 (Schultz, Tian and Twite 2013).
Law
Section 203C of the Corporations Act, 2001 states that the shareholders of a private company may pass an ordinary resolution removing a director of a company and appointing a new director in his/her stead.
Section 259A of the Corporations Act, 2001 states that a company is prohibited from acquiring its own shares when (De Bakker et al. 2013):
- Exercising buy-back options.
- When getting an interest in fully paid up shares in situations where no consideration is given for the same.
- When directed by the court by virtue of an order.
Section 232 of the Corporations Act, 2001 states that a company must not act in a way that is detrimental to the shareholders as a whole or oppressive to a particular class of shareholder and gives the court powers to intervene in case of the same (Murray 2017).
The resolution to remove Marigold as director would thus have to be passed by virtue of the powers conferred under Section 203C of the Corporations Act, 2001 which is applicable due to the provision of Section 135 of the act and the fact that the company does not have its own constitution. The other 3 directors can thus pass a majority vote removing Marigold as a director. However, due to the fact that Marigold is a minority shareholder and she was not being remunerated for services rendered by her the remaining shareholders could be deemed to have misused their majority position and oppressed a minority shareholder. Marigold could thus refute the resolution on the same grounds. This would follow the provisions of Section 232 of the act (Whincop 2017).
However, in removing Marigold as a shareholder, the company would thus have to acquire her shares in the same. Thus, following the provisions of Section 259A this would be deemed an acquisition of interest in fully paid up shares where no consideration is being given to the holder and consequently such an acquisition would be illegal (Ferran and Ho 2014). Thus, Marigold must be given consideration for her contribution to the share capital if she is to be removed as a shareholder of the company.
Conclusion
The shareholder can thus pass a resolution removing Marigold as a director but Marigold would be entitled to contest it.
Scarlett cannot pass a resolution removing Marigold as a shareholder without her giving her consideration for her share of the share capital. Marigold must also consent to the acquisition of her shares.
The company is owned by the 4 shareholders and their share holdings in respect of the same are described above. In such a situation Scarlett wishes to issue 100 new shares for her husband at a rate of $1000 per share. However Essence does not want such an issue to take place. Thus, the issue here is to determine if Scarlett can successfully make such an issue.
Application
As stated above companies carrying on business within the jurisdiction of Australia are governed and regulated by the Corporations Act, 2001.
Section 254D of the act lays down a pre-emption for existing shareholder in case of issue of new shares. This pre-emption states that in case of issue of new shares by the company (in case of a proprietary company) the company must thus ensure that these shares are offered to the existing shareholders (holding shares of that class) first and in case the same are not acquired they may be offered to others (Tonts and Taylor 2013). However, this section also lays down that this requirement of offering the shares to the existing shareholders first can be circumvented by passing a resolution at a general meeting (Herbohn, Walker and Loo 2014).
From the given set of facts and circumstances it can be inferred that all 4 shareholders held shares of the same class. Scarlett is a majority shareholder and wishes to issue fresh shares for her husband at a determined price. However as provided for by the provisions of Section 254D of the Corporations Act, 2001 the newly issued shares would first have to be offered to the shareholders who already hold shares of the same class (King 2017). Ideally this offer should be made in proportion to their current shareholdings of the same class. Thus for Scarlett to issue shares of this class to her husband she would first have to offer these shares to the current shareholders of the company. This thus makes it evident that she would not be able to directly issue these shares to her husband.
However in light of the fact that Scarlett is a majority shareholder she may pass a resolution to bypass this requirement at a general meeting. But this would need the ascent of other shareholders too as a minimum of 50% votes must affirm the action. Thus unless the other shareholders ascent to it Scarlett would not be able to issue such shares on her own motion.
Conclusion
Scarlett would not be able to make such an issue of shares directly for her husband and would have to offer these shares to the existing shareholders first.
The issue here is to determine if the acts of an agent are binding on the company and if the company can be held liable for such acts. The situation is that a patron of the bakery falls ill due to the consumption of one of their products. Azelea was the employee present on the scene and was the person responsible for preparing the food that caused this damage.
Conclusion
Corporations Act, 2001 provides for three kinds of authority when dealing with breaches due to the acts of an employee. The authority vested in the employee could be express, implied or ostensible. In case of ostensible authority a third person dealing with the company would have the right to assume that the employee had authority to act on behalf of the company. Section 129 (3) of the Corporations Act, 2001 further reiterates this position (Brown and Dickfos 2015).
The benchmark for determining if the employee had ostensible authority is if such an authority would be endorsed in another company in the same industry. This was laid down in NCR Australia Pty Ltd v Credit Connection Pty Ltd [2004] NSWSC 1 (Stephens 2017).
In the given set of circumstances, Azelea was the only employee available on the day that the patron made the purchase. Azelea was further authorized to engage in cooking activities at the bakery as that was her primary job there. She thus had implied authority to cook and serve food on behalf of the company. Furthermore as she was the only employee present and any third party transacting with the company would be able to assume that she has the authority to cook and serve following the provisions of Section 129 (3). Thus the person would presumably attribute liability to the company for the same (Clarke 2013).
Following the judgment in NCR Australia Pty Ltd v Credit Connection Pty Ltd [2004] NSWSC 1 any bakery would obliviously authorize their employees to cook and serve food thus the benchmark for the activity would be met. Thus the company would be liable for these acts.
Conclusion
Thus the acts of the agent (Azelea) would bind the company and thus the company would be liable to be sued for the same.
Reference list
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance. Routledge.
Schultz, E., Tian, G.Y. and Twite, G., 2013. Corporate governance and the CEO pay–performance link: Australian evidence. International Review of Finance, 13(4), pp.447-472.
De Bakker, F.G., Den Hond, F., King, B. and Weber, K., 2013. Social movements, civil society and corporations: Taking stock and looking ahead. Organization studies, 34(5-6), pp.573-593.
Murray, G., 2017. Capitalist networks and social power in Australia and New Zealand. Routledge.
Whincop, M.J., 2017. Corporate governance in government corporations. Routledge.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Tonts, M. and Taylor, M., 2013. The shifting geography of corporate headquarters in Australia: A longitudinal analysis. Regional Studies, 47(9), pp.1507-1522.
Herbohn, K., Walker, J. and Loo, H.Y.M., 2014. Corporate social responsibility: the link between sustainability disclosure and sustainability performance. Abacus, 50(4), pp.422-459.
King, S.P., 2017. Corporatisation and the behaviour of government owned corporations. In From Bureaucracy to Business Enterprise (pp. 43-58). Routledge.
Brown, C. and Dickfos, J., 2015. Receivership & restructuring: The Australian productivity commission’s proposed reforms to s420A of the Corporations Act 2001 (Cth). Company and Securities Law Journal, 33(7), pp.501-505.
Clarke, I.M., 2013. The Spatial Organisation of Multinational Corporations (RLE International Business). Routledge.
Stephens, B., 2017. The amorality of profit: transnational corporations and human rights. In Human rights and corporations (pp. 21-66). Routledge.
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