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Week 1: Introduction & Characteristics
What is a corporation?
Defined in the Corporations Act 2001 – SECT 57A a corporation is:
(1) Subject to this section, in this Act, corporation includes:
(a) a company; and
(b) any body corporate (whether incorporated in this jurisdiction or elsewhere); and
(c) an unincorporated body that under the law of its place of origin, may sue or be sued,
or may hold property in the name of its secretary or of an office holder of the body
duly appointed for that purpose.
(2) Neither of the following is a corporation:
(a) an exempt public authority;
(b) a corporation sole.
(3) To avoid doubt, an Aboriginal and Torres Strait Islander corporation is taken to be a
corporation for the purposes of this Act.
Nature of a Corporation
“Owned” by members/shareholders
Managed by directors: s 198A:
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(1) The business of a company is to be managed by or under the direction of the
directors. Note: See section 198E for special rules about the powers of directors who
are the single director/shareholder of proprietary companies.
(2) The directors may exercise all the powers of the company except any powers that
this Act or the company's constitution (if any) requires the company to exercise in
general meeting. Note: For example, the directors may issue shares, borrow money and
issue debentures.
Sole Traders
Formation: Limited formalities, low compliance, and not separate legal entity.
Liability: Unlimited.
Transfer/Succession: Difficult.
Management: Individual.
Fundraising: Limited by personal asses, and personal borrow.
Tax Implications: Marginal income tax rates
- Now: “one person” company, see s 114, s 201A
Trusts:
Formation: Complex structure, and not separate legal entity.
Liability: Trustee – Unlimited liability, Beneficiary – limited to share in trust.
Transfer/Succession: Complex, and subject to trust conditions
Management: Trustee
Fundraising: Difficult
Tax Implications: Beneficiaries: individual marginal rates, Trustee: penalty rates (top
marginal rate).
Incorporation
Process; s 117 - Register by lodging form with ASIC; Form 201, $469.
s 118 – ASIC:
Register company;
Gives ACN (Australian Company Number)
Issues certificate of registration
Characteristics of a company
Independent legal entity
Limited Liability
Sue or be sued
Perpetual Succession
Acquire, hold and dispose of property
Corporate Veil
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An imaginary veil separating the independent legal entities from one and another, see the
following cases.
Creditor, founder, vendor, director, and shareholder – Salomon v Salomon & Co Ltd
Employment relationship - Lee v Lee’s Air Farming
Insurance issues – Macaura v Northern Assurance
Exception to the Corporate Veil
Is the general rule of:
- Avoiding legal obligations, see Gilford Motor v Horne
- Commit a fraud, see Re Darby
- Involvement in directors’ breach of duty, see Green v Bestobell Industries
- Attribution – direct mind + will, see Tesco Supermarkets v Nattrass
Statue:
- Directors’ Liability for insolvent trading, see s 588G
- Parent company liability for subsidiary debts, see s 588V
- Uncommercial transactions, see s 588FB
- Security interests to officers, see s 588FP
- Directors’ liability for unremitted tax, see Income Tax Assessment Act 1997
(Cth)
- Financial Assistance, see s 260D
- Tax Consolidation, see s 296, AASB 10
Types of companies.
There are various types of companies such as the following:
Public
Proprietary No liability
Listed Subsidiary
Limited by shares Holding Company
Limited by guarantee Unlimited Related Body Corporate
Public Companies
“Ltd”
Members - min 1, no max: s 114
Directors - min 3, 2 Aust resident, no max: s 201A(2)
Company secretary, Aust resident
Flexible fundraising options
Auditor
AGM
Proprietary Companies
“Pty Ltd”
Members:
min 1 – s 114
max - Up to 50 non-employee members – s 113
Directors – min 1, Aust resident, no max: s 201A(1)
Company secretary not required
Restrictions on fundraising activities
Generally, auditor not required
Generally, AGM not required
- Small Proprietary Companies
s 45A (2): 2 out of 3 at end of FY:
< $25m gross operating revenue
< $12.5m gross assets
< 50 employees
Listed Company
Must be public
Listed on stock exchange
ASX Listing Rules
Highly regulated
Corporate Groups
Subsidiaries and Holding Companies
- s 46(a): Definition
(i) Controls composition of board OR
(ii) Controls >50% votes OR
(iii) Holds more than >50% of shares
- s 47: Control composition of board = appoint or remove majority of directors
Related Bodies Corporate – s 50:
- (a) holding company
- (b) subsidiary
- (c) subsidiary of same holding company
Change of status
s 162(1): change status by special resolution (75%)
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Week 3: Pre-Incorporation Contracts, Promoters, and Directors
Promoters
A promoter is somebody who is involve in the formation of a company, or in involve in
taking the necessary steps, but is not a professional assisting.
Undertakes to form company/takes necessary steps, see Twycross v Grant.
Involved in formation – Active/ Passive Investor, see Tracy v Mandalay.
Promoter’s Obligations
Fiduciary obligations to company:
Relationship of trust
- Act in company’s best interests
- Avoid conflicts of interest
Interest in contract, see ERLANGER v NEW SOMBRERO.
Undisclosed profit, see GLUCKSTEIN v BARNES.
Promoter’s Duty of Disclosure
Promoters have the duty to disclose:
- To independent board of directors
- Otherwise – shareholders
- Prospectus disclosure – Chapter 6D
Remedies for breach:
- Rescission
- Recovery of profit
- Damages
Pre-Incorporation Contracts
Contract entered before incorporation. These is where the promoter want the client to enter
into an incorporation with another party.
General law, see Kelner v Baxter.
- Unformed company could not have agent
- Ratification not possible
- No liability for contracting on company’s behalf
- Novation only
Statute has overridden the general law.
- s 133 – replaces general law
- s 131(1) - company bound if contract ratified within time agreed / reasonable time
- s 131(2) – person entering contract liable if no ratification
- s 132(1) – other party may give release
Directors
A director under section 9 is a person who:
Properly appointed director
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Properly appointed alternate director
De facto director
Shadow director – can include company, see Standard Chartered Bank v Antico.
Function of Directors
Board – Management power, see section 198A.
- Business of company managed by/under direction
- Exercise all powers of company, except those reserved to general meeting
Powers reserved to members (eg):
- Appoint/remove directors, see s 201G, s 203C, s 203D
- Amend constitution, see s 136(2)
- Change company type, see s 162
- Change company name, see s 157
- Voluntary winding-up, see s 491
- Issue of preference shares, see s 254A
Note: Members cannot override management decisions, see AUTOMATIC SELF-
CLEANSING FILTER v CUNNINGHAME.
Number and Qualifications of Directors
s 201A:
- Pty: at least 1, Aust resident
- Public: at least 3, 2 Aust resident
s 201B:
- Must be 18
- Must be natural person
- No upward age limit
Types of Directors
MD: s 201J, s 198C (cf: CEO)
Chair: s 249U, s 248E
Alternate director: s 201K
Nominee director
Executive director
Non-executive director
Appointment of Directors
On incorporation, see s 120(1) – named in Form 201
After incorporation
- Appointed by general meeting: s 201G
Ordinary resolution
- If vacancy, board can appoint director – s 201H:
Pty - Shareholder confirmation within 2 months
Public - Shareholder confirmation at next AGM
Removal of Directors
Pty – General Meeting, see s 203C.
- Ordinary resolution.
Public – General Meeting, s s203D.
- Ordinary resolution
- 2 months’ notice
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Board cannot remove directors, see s 203E.
Automatic Disqualification
206B:
Disqualified:
- 5 years if convicted of:
(1)(a) - offence concerning company management
(1)(b)(i) - Corporations Act offence, punishable >12 months’ jail
(1)(b)(ii) - Offence of dishonesty, punishable at least 3 months’ jail
(1)(c) - Offence against the law of foreign country, punishable by >12 months’
jail
- Whilst:
(3) - undischarged bankrupt
(4) - bound by personal insolvency agreement, not yet complied with
(6) - disqualified from managing company by foreign court
Disqualification by ASIC
s 206F: ASIC can disqualify if:
- in last 7 years
officer of 2 or more companies wound up
unsecured creditors received 50c/$1 or less
- Up to 5 years
- Notice requirements
Disqualification by Court
On ASIC’s application, courts can disqualify if:
- s 206C – breached civil penalty provision (s 1317E)
period Court considers appropriate
- s 206D: in last 7 years
Officer of 2 or more failed companies AND
management partly responsible for failure
up to 20 years
- s 206E: 2 or more Corporations Act breaches
by officer or
by company whilst officer + failed to take reasonable steps
period Court considers appropriate
Effect of Disqualification
Cannot be officer or director for relevant period.
- Offence while disqualified: s 206A(1)
Schedule 3 - 50 penalty units ($9,000) / 12 months’ jail
[Each penalty unit is $180]
- Can be personally liable for debts within 4 years of winding up: s 588Z
Can apply for leave
- by application to ASIC: s 206F(5)
- by application to Court: s 206G(1)
Officer
Company secretary
Senior managers:
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Person who makes/participates in making decisions affecting the whole or substantial
part of company’s business
Person who has capacity to significantly affect the company’s financial standing
Insolvency controllers (eg receivers, administrators, liquidators)
Week 4: Members/Shareholders
Members
All companies have members, according to s 114 the minimal amount must be 1.
For Pty companies there must be 50 non employee shareholders max, see s 113(1).
However, for public companies there are no maximum.
In order to become a member, see s231.
On incorporation – Form 201, consent
After incorporation
- Issue of shares
- Transfer
Register of member, s 168(1)(a), s 169.
Issue of Shares
s 124(1) – Power to issue
s 254B – Company can determine:
Terms of issue
Rights + Restrictions
Pre-emptive rights on issue, s 254D Pty companies (replaceable rule).
Transfer of Shares
S 1070A outlines the transferable, subject to constitution.
Listed companies:
Cannot have transfer restrictions
Electronic Transfer, CHESS
Non-listed companies, see s 1071B – deliver transfer to company:
Transfer restriction must be clear + unambiguous, see GREENHALGH v
MALLARD.
Registration of share transfer:
- Pty Company directors may refuse to register transfer for any reason, see s
1072G (replaceable rule)
o Except on death/bankruptcy, court ordered transfer, trustee transfer,
see ANDCO NOMINEES v LESTATO
o Must give notice of refusal within 2 months, see s 1071E
o Must be in good faith in best interests of company, see RE SMITH
and FAWCETT
o No requirement to give reason for refusal
Court can order transfer be registered if refusal “without just
cause”, see s 1071F; RE WINMARDUN
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Types of Shares
Ordinary shares
General characteristics:
- Right to vote at general meeting
- No automatic entitlement to dividends
- Participate in surplus assets on winding-up
Preference shares
General characteristics:
- Restricted voting rights
- Cumulative entitlement to dividends
- Priority of payment of dividends
- Priority of repayment of capital on winding-up
- No share of surplus assets on winding-up
- May be redeemable/convertible
s 124(1) – Power to issue
s 254A(2) – Can only issue preference shares if:
Rights in constitution or
Approved by special resolution.
Dividends
Distribution of profit to shareholders
s 254T(1) - Can only be paid if:
Assets exceed liabilities
Fair and reasonable to shareholders as a whole
Does not materially prejudice ability to pay creditors
s 254T(2) - assets and liabilities calculated in accordance with applicable accounting
standards.
Directors’ discretion, see s 254U
Amount
Time
Method (cash, shares, options, transfer of assets)
Cannot be paid if:
Company insolvent OR
Payment would cause insolvency
- Duty to act in best interests of company
- Duty to avoid insolvent trading, see s 588G
Failure to pay can amount to oppression, see SANFORD v SANFORD COURIERS
Disclosure
s 706 – disclosure for share issue unless s 708 or s 708AA applies.
s 708 exceptions:
(1) Small scale offerings: 20 investors/$2 million/12 months
(8) Sophisticated investors: $500K investment OR assets of $2.5 million or income
of $250K
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(10) Through financial services licensee: Satisfied has experience assessment of
merits + risks
(11) Professional investors: $10m in assets, superannuation fund, financial services
licensee
(12) Senior managers (spouse, parent, child, sibling)
(15) No consideration
(18) Takeover bids, see s 708AA exception – rights issue for listed companies
Disclosure Documents – s 709:
Prospectus
- Full disclosure document
Short form prospectus – s 712
Refers to material lodged with ASIC
Offer information statement – s 709(4)
$10 million or less
Profile statement - s 721
Needs ASIC approval
Can only be issued by public companies: see s 113(3): Pty Co must not engage in activity
requiring disclosure.
Effect of Irregularities
Irregularity does not invalidate meeting – s 1322(2):
Court can declare meeting void: s 1322(3)
- Substantial injustice, cannot be remedied: s 1322(3A)
o Different result would have been achieved: CHEW INVESTMENT
AUSTRALIA v GENERAL CORP
Court can declare meeting not invalid: s 1322(4)(a)
Must be satisfied – s 1322 (6):
- Parties acted honestly or
- Just + equitable to make order
Constitution
Company constitution
Internal rules, see s140(1): contract between:
- Company + each member
- Company + each director
- Members
o Company can compel compliance: Hickman v Kent Or Romeny
Marsh Sheep Breeders.
Source
s 134
Replaceable Rules
- Within Corporations Act
- Not for “one person” company, see 135(1) – Special rules (ss 198E, 201F,
202C).
- s 141 – list of rules, eg:
o Appointment of directors
o Powers of directors
o Calling meetings
o Pre-emptive rights in Pty companies
- s 201G – Appointment of directors: General meeting may appoint director
by resolution
- s 254D – Pty Co pre-emptive rights on share issue: Before issuing shares,
must offer to existing shareholders, proportional to shareholding
- s 1072G – Pty Co directors’ discretion to refuse share transfer
registration: may refuse for any reason
Constitution
- Own internal rules
o On registration if all members consent: s 136(1)(a)
o After registration by special resolution: s 136(1)(b)
Combination
- Use of replaceable rules
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- Supplemented by additional rules
- Alter / remove replaceable rules by special resolution
o Replaceable rules may be displaced / modified by constitution: s
135(2)
Choice of Constitution
Company registered after 1 July 1998:
Replaceable Rules automatically apply: s 135(1)(a)(i)
Can resolve otherwise, special resolution: s 136(2)
Company registered prior to 1 July 1998:
Replaceable Rules don’t apply unless adopted by repealing constitution –
s135(1)(a)(ii)
Amending Constitution
Special resolution: s 136(2)
Public Co must notify ASIC, 14 days: s 136(5)
General law restrictions – GAMBOTTO v WCP LTD:
If expropriation of property, must be:
For proper purpose AND
Fair in all circumstances
- Process
- Price
If no expropriation of property, valid unless oppressive.
Statutory restrictions
s 140(2): Member not bound by amendment made after became member if:
- Requires purchase of additional shares
- Increases members’ liability
- Increases liability of member to pay money OR
- Imposes restriction on right to transfer shares
s 140(2): Bound if agree in writing
General Law
Rules of agency:
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Agent / Principal relationship
Types of agency:
Actual Authority
o Express
o Implied
Ostensible Authority
Ratification
Constructive Notice and Indoor Management Rule
Actual Authority
Express: Express grant of authority to agent
Examples
letter of appointment
Constitutional grant
Statutory examples:
s 198A: management power to board
s 198C: board delegation to MD
s 198D: unless constitutional restriction, board delegation to:
- Committee of directors
- Single director
- Employee
- Any other person
Implied: Implied to actually exist from agent’s position:
Managing Director: HELY-HUTCHINSON v BRAYHEAD
Company secretary: PANORAMA DEVELOPMENTS v FIDELIS
Single director: NORTHSIDE DEVELOPMENTS v REGISTER-GENERAL
Ostensible Authority
Apparent authority, authority by estoppel.
Assumed to exist as a result of circumstances:
3 Requirements:
- Representation by works or conduct: FREEMAN + LOCKYER v
BUCKHURST PARK
- Made by person with actual authority: CRABTREE-VICKERS v
AUSTRALIAN DIRECT MAIL AND
- Reliance by third party
Ratification
Adoption or confirmation of contract made without authority: BOLTON PARTNERS v
LAMBERT
Express or implied
Words or conduct
Effect of Forgery
General law:
Indoor management rule does not protect against forged documents.
- Forgery is always void at general law: RUBEN v GREAT FINGALL
CONSOLIDATED
Statute
Statutory Assumptions: s 129: When dealing with company, can assume:
(1) Constitution complied with
(2) Person listed as director / secretary on ASIC records:
validly appointed and
customary authority
(3) Person held out as officer / agent
validly appointed
customary authority
(4) Officers / agents properly perform duties
(5) + (6) Document properly executed if complies with s 127
Statutory Assumptions
s 127: s 129(5)(6) assumptions apply to these types of execution:
(1) Execution without common seal, signed by:
(2) Execution with common seal, witnessed by:
(a) 2 directors
(b) director + company secretary
(c) sole director (if only one)
Can assume person signing in either capacity holds that office: BRICK & PIPE
INDUSTRIES v OCCIDENTAL NOMINEES
(4) Does not limit ways of execution
s 128 – Limitations:
(1) Company cannot assert assumptions incorrect
(2) Apply where outsider then deals with third party
(3) Apply even if officer / agent acts fraudulently or forges document: STORY v ADVANCE
BANK
(4) Outsider cannot rely on assumptions if knew or suspected assumption incorrect
Actual not constructive: ORIS v NAB
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Effect of Fraud or Forgery
Statutory assumptions – s 128:
(3) Apply even if officer / agent acts fraudulently or forges document: STORY v ADVANCE
BANK
(4) Outsider cannot rely on assumptions if knew or suspected assumption incorrect
Actual not constructive: ORIS v NAB
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