Corporation Law Case Study Example

Q.1. The main issue is that Cotton Limited., which owns the majority of Satin Co. Limited's shares is trying to buy-back the minority shares held by Silk and the rest of other investors. However, the minority shareholders are against the idea particularly Silk. Since Cotton Limited could not get Silk to agree with the buy-back option. The majority shareholders resorted into passing a resolution to change Satin's constitution, giving power to the majority shareholders to compulsorily acquire the minority shares. The problem is that Silk is not convinced to sell her shares and seeking legal action to stop the proposed resolution. In this kind of situation, it is the duty of the directors to exercise their powers in good faith. This includes exercising that power for the proper purpose, for the company's best interest and not to gain personal advantage. Any act of improperly exercising such power would be deemed invalid and the company will have to be compensated for doing such. There is an element of oppressive conduct that manifests in the case. The court will not consider a compulsory sale or purchase of shares if the directors, the company itself and the shareholders act oppressively against a shareholder. If the court have established that the directors have acted in an oppressive manner, there would be a wound up order to be given to the oppressing party. This rule applies according section 461 in relation to section 232 of the Corporations Act. To apply these rules and conclude the case at the same time, Cotton Limited cannot compel Silk and the other minority shareholders to sell their share. Given the rules and the circumstances of the case, Silk would have a chance of winning a legal battle against the majority shareholders. However, things could turn around if Cotton Limited could find and prove that Silk is refusing the proposition because of conflict of interest. It would be impossible for Silk to win a legal battle with Cotton Limited if she was proven to be taking advantage of her membership in the board.
Q.2. Regarding the rule in allowing certain business conducted at company meetings to stand notwithstanding strict compliance with all the legal requirements of Corporations Acts. According to the rule, holding a board meeting for the purpose of changing the constitution requires compliance to the statutory requirements. One is issuing a notice to all board members of the meeting schedule at least 21 days prior. In the given case of Satin Co. Limited, the objective of the scheduled meeting is to pass a resolution not necessarily to change, but to add a new clause to the existing constitution. Such resolution according to the rule is classified as a special resolution. Therefore, it is necessary to comply with the statutory requirements. Not adhering to the rule will void the validity of the passed resolution. First, requirement is that the resolution should only be passed during a general meeting of board members, it could be the annual or a special general meeting. Passing resolution during committee meetings are considered invalid. Notice of the meetings should also state the purpose and textual presentation of the proposed resolution. Special resolutions passed at a general meeting must meet at 75% of the board members in favor including those that are not present. The ruling on absentee voting is to have an authorized proxy to represent the board member during the meeting. Lodging of approve resolutions have to be approved by the Registrar of Incorporated Associations or the Registrar of Co-Operatives in order to take effect. After approval, the resolution must be lodged with Consumer Affairs Victoria at least 28 days after the meeting was concluded. The company cannot initiate the changes and the constitution will remain as it is until the copy of the resolution has been lodged with CAV. Companies such as Tassal Group, Westpac, ANZ, ING, Orica and Wesfarmers have followed the same rules and complied with the requirements when they change their constitution. The only difference is that most of them have passed resolutions not to buy-back minority shares, but to allow shareholders to directly vote during the meeting.
Q.3. Situation 1 – Polyester have directly violated the provisions of Corporations Act Sections 181 and 182 or defined as director's fiduciary duties. According to section 181 and 182, directors are not allowed at any time to exercise their power for personal advantage. Polyester's transfer of funds from company account to her personal account is not acceptable at any level. Such action qualifies as an act of stealing and embezzlement implicating financial loss to the company. Any form of asset whether cash, equipment or stocks are considered company owned and are not subject for personal consumption.
Situation 2 – Transferring the company's assets to another company is possible especially if the company is facing financial difficulties, but the process has to adhere to the rules of transfer. First, transfer of assets can only take place if the assets were sold and bought by the other company. Secondly, there has to be a prior approval of the entire board in order to commence transfer of assets. Based on Polyester's decision to transfer the company's assets to the one of her own is a violation of section 200C of Corporations Act. This refers to the association of the third party to the board member initiating the transfer. Conflict of interest is prohibited in all levels of all organizations, much more is the transfer of company assets to a third party that has a direct association with both. Furthermore, the third-party company is considered a competitor since it is engaged on the same nature of business as the other.
Situation 3 – In Corporation Act, company directors and all officers should exercise their power and perform their duties with utmost diligence. This is also the main context of the judgement rule, which requires company directors and officers to practice judgement appropriately. As for Polyester's decision to provide credit even exceeding the prescribed limits to a trade debtor with bad debt history demonstrate lack of appropriate judgement. Judgement rule is plain and simple, never make decisions that will have negative implications to the business.