Week 6: Directors and Corporate Management

Week 6 → Directors and Corporate Management Directors Fiduciary Duties Who is a director? - S9 Corporations Act: 1. A person who is 1) appointed to the position of director, or 2) is appointed to the position of an alternate director and is acting in that capacity. 1. Unless the con...

Week 6 → Directors and Corporate Management Directors Fiduciary Duties Who is a director? - S9 Corporations Act: 1. A person who is 1) appointed to the position of director, or 2) is appointed to the position of an alternate director and is acting in that capacity. 1. Unless the contrary intention appears, a person who is not validly appointed is a director if: 1) they act in the position of a director ('de facto director') or 2) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes ('shadow director' → can be company does not have to be a person). De Facto directors ((s9 (b) (1)): - Need to be officially appointed: the test is whether they were acting in the position of a director. - May have resigned: the test is whether the tasks they performed were those normally undertaken by director. - An individual which can be liable for breaching directors duties owed to the company. Shadow director: - Does not have to be an individual, can be a company. - Takes on director duties but is not officially listed or appointed to the board. - Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd. Alternate directors ((s9 (a) (ii)): - A person appointed to act as a 'fill-in' for a director who for some reason at the time is unable to act as a director. - The alternate director is a director only at the time they are called upon to act in the place of the absent director. Types of directors: - Managing Director → appointed pursuant to s201J and may take all the board's powers under s198C. - Chair of Directors → exercise procedural control at meetings (s248E) and signs the minutes. - Nominee Directors → are often appointed to represent the interests of a particular class or classes of shareholders. A subsidiary's directors may be nominees of the holding company. E.g. employees may be entitled, pursuant to the company constitution, to elect a director. A subsidiary's directors may be nominees of the holding company. - Executive Directors → full-time employee of the company and as such owe contractual, common law and statutory obligations to the company. - Non-executive Directors → not involved in full-time management of the company and not an employee. Often these are experts who can provide specific expertise in relation to certain areas of the company's business. Appointment of directors: - s201A requires: - Public companies must have at least 3 directors. - Proprietary company to have at least one director. - Restrictions on appointments: - Individual not a company (s201B(1)). - Must be at least 18 years old (s201B(1)). - The person must consent to appointment as director (s201D). - Must not be disqualified from being a director (s201B(2)). - Appointment of directors: - When companies are formed, the directors will be those persons named in the application to register the company lodged with ASIC. - Post-registration, directors can be appointed by: - Shareholders in general meeting (s201G - replaceable rule). - In some cases other directors (s201H - replaceable rule). Removal of directors: - Directors can be removed by the shareholders in general meeting. - However: - In proprietary companies - the replaceable rules or constitution govern removal of directors (s203C) and accordingly 'entrenchment' of directors is possible (governing director). Cannot then be removed. - In public companies - the directors can be removed by shareholder resolution regardless of any provisions in the constitution. Disqualification of Management: - Automatic Disqualification (s 206B). - Convicted of certain offences. - Bankruptcy. - Entering a personal insolvency agreement. - Period of disqualification is 5 years plus up to a further 15 years. - By court order: - Contravention of civil penalty provisions (s 206C) - unlimited disqualification. - Manage 2 or more failed companies within last 7 years (s 206D) - 20 years (maximum disqualification). - Repeated contraventions of the Corporations Act (s 206E) - unlimited disqualification. - By ASIC directly (s 206F): - A director of 2 or more companies that have gone into liquidation within the last 7 years paying unsecured creditors less than 50% of their debt. - Period of disqualification 5 years (maximum). Directors Duties: - Directors duties arise from 3 main sources: - General Law - Fiduciary Duties. - Corporations Act - Statutory Duties. - Company's constitution and replaceable rules. Directors' Fiduciary Duties: - Classification of fiduciary duties: 1. Loyalty and Good Faith - Duty to act in good faith and in the best interest of the company. - Duty to use power for a proper purpose. - Duty to avoid conflicts of interest. - Duty to retain discretion. b. Care and Diligence - Duty to act with reasonable care and diligence. - Directors owe their fiduciary duties to the company. - Breach of fiduciary duty is enforced by company. - If the company is in liquidation, it will be the liquidator who has power to bring actions on behalf of the company. - ASIC, on the other hand, enforces the statutory duties. → Where there is a breach of the fiduciary (general law) duties the company seeks a remedy (an order compensating the company for any loss sustained). - If there is a breach of statutory duties ASIC will seek a penalty (punishment). - Remedies for breach: - Damages (what the company has lost). - An account of profits (what the director has gained). - Rescission of a contract. - Injunction (an order requiring or restraining a certain action). - Constructive trust arrangement. Who is the company? - When a company is solvent the directors should be aware of the shareholders interests. - Parke v Daily News. - When a company is insolvent the directors should be aware of the creditors interests. - Kinsela, directors transferred asset to themselves before company went into liquidation, therefore, breaching their duty. Ratification: - Ratification is available for general law (fiduciary duties) breaches. - Fiduciary duties are owed by directors to the company. - Allows directors to get out of their breaches. - When directors breach their fiduciary duties, the company (via a shareholders general meeting) may ratify (approve or forgive) the directors conduct. Limitations to ratification: - Ratification is not possible if the company is insolvent. - Kinsela v Russell Kinsela Pty Ltd. - Ratification is not possible if there is fraud on the minority shareholders. Fraud on minority → shareholders who are bullied. - Cook v Deeks. - Ratification is not possible when there is a breach of statutory duties (Corpoartions Act). - Angus Law Services Pty Ltd v Carabelas. - Ratification is not possible when a director acted fraudulently or dishonestly. Duty to act in good faith: - To act in good faith means the director must genuinely believe that they are acting for, and in the best interest of the shareholders as a whole (the company). - However, the duty requiring directors to act in good faith duty also has an objective element. What the director considers as in the best interest of the company may not be what the court considers to be so (Advance Bank v FAI Insurance Ltd). - It is necessary to consider what an objective, rational director would consider to be in the best interests of the company. Cooks v Deeks: - ¾ directors/shareholders formed a new company and arranged for the business of the first company to be transferred to the new company. - They breached their duties to the first company and their attempt to ratify the conduct in breach (as majority shareholders) failed. - The Court made an order compensating the loss to the first company by imposing a trust agreement. The 3 directors holding the benefit of their breach (the business transferred to the new company) on trust for the first company. Duty to act for a proper purpose: - Directors have extensive powers to run the company, however where they use such power to prejudice groups of shareholders or to secure their own positions they may breach their duty. - Howard Smith v Ampol: 2 major sharheolders controlled 55% if the shares - they bid for further shares and control of the company - directors issued new shares to frustrate bid - the 2 shareholders now reduced to minority interest. Directors did not act for proper purpose. - Ngurli v McCann - act in self-interest. Director acted in self interest, so not for a proper purpose. Duty to avoid a conflict of interest: - Directors\' fiduciary duties require them to act in the company's interest at all times. - Furs v Tomkies, sale price was disclosed, director told buyer company that this offer will be accepted and they wanted to be employed as a director for the information exchange - it will be a breach of duty where directors conduct secret negotiations to the company's detriment. - Where opportunities arise in the normal course of directors carrying out their role (corporate opportunity) they should not seek to benefit personally, or take the matter further, unless they have disclosed relevant matters to the board. - Disclosure is essential. - QLD Mines v Hudson; see s 191. Week 7 → Directors Statutory Duties Corporate Governance Financial Reporting and Disclosure Obligations Audit Material personal interest → involves a real possibility of conflict. Section 191: - Requires that a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the directors notice of interest unless s191 (2) says otherwise. - S 191 (2) - examples when disclosure is not needed: - Director's remuneration. - Interest where the director is a guarantor of a loan to the company. - Where (in Pty company) the directors are already aware of such interests. Directors Statutory Duties: - The Act sets out that general law re directors\' fiduciary duties are still relevant. - Statutory duties apply not only to directors but also apply to other company officers (s9 & s179) and in some cases employees (s182 and s 183). - The statutory duties are enforced by ASIC - specific penalties apply depending on the section breached. - Provisions in the Corpoations Act dealing with directors' duties can be dividied into 4 main groups. - Director's position - good faith, proper purpose and avoid conflict interests (s181, 182 and 183). - Dishonest or reckless conduct (s 184). - Management standards - care and diligence (s 180 & s588G). - Disclosure obligations (s191 & 192). Directors Statutory Duties: - Fiduciary duties bought into the Corporations Act. - S 181 → mirrors the general law duty to act in good faith, in the best interests of the company and for a proper purpose. - S 182 → duty to not misuse position to gain advantage. - S 183 → duty to not misuse information to gain advantage. - Sections 181, 182 and 183 are civil penalty provisions and breaches may result in the imposition of civil penalties. Civil penalty provisions → compensating people. Dishonesty in the Corporations Act will cause criminal charges. Need to show evidence to show directors were being dishonest. **FINES**. Civil Penalties: - Section 1317G - the greater of (a) 5000 penalty units (sum of money which changes around every 3 years), and (b) if the court can determine the benefit dervied and the detriment avoided because of contravention, then that amount is multiplied by 3. MONETARY TERMS. - Section 1317GAB - a relinquishment order to pay the benefit derived and detriment avoided. - Section 1317GA - a refund order where fees for service were received after fee arrangement terminated. - Sections 1317H - this section applies where there is a breach of the civil penalty provisions and enables the court to order a person to compensate the company for damage resulting from the contravention. - Section 206C - provides for disqualification where a civil penalty provision is breached. Criminal Penalties: - S 184 - where a director fails to act in good faith or for a proper purpose (as in s 181), or misuses their position (s128) or infomraito (s183) for gain and where the conduct is reckless or dishonest then this will be in breach of s184. - Criminal penalty provisions apply to a breach of s184. - There are severak sections of the Coropations Act tha tresult in criminal penalties - a list of these sections and the imprisonment and fines (monetary penalties). - Where Sch 3 does not set out a specific mentoary penalty s1311B will be relevant to the calculation of any monetary penalty payable. Asires under: - General law → under general law whether a director had breached the duty of care and diligence depended on a largely subjective assessment of the director's own skills and knowledge. - This general law standard (as applied in Re City Equitable) is no longer relevant - assessing care and diligence is an objective exercise today. - Statute law → - S180 → s 180 (1) - act with reasonable care and diligence. Would a reasonable person in the same circumstances and the same position have made that decision → if not it is a civil penalty provision. -  S 180 (2) - business judgement rule (BJR). Defense for directors in accordance to care and diligence. Subsection which helps directors, based on the idea the if a director is doing certain things in a certain way, that is enough to satisfy their duty of care and diligence. Care and Diligence: - Accountability and objectivity have altered the application of the general law standard in regards to a director's duty of care. - Daniels v Anderson: Court of Appeal found the executive direcors of AWA Lrd had been negligent and that directors must understand the nature of the duty they are required to perform and be familiar with the business of the company. Not monitoring an investment portfolio. Let someone invest which ripped the company off. Directors were ⅓ liable, auditors ⅔ liable. - Directors must be pro-active in their approach to management. - Keeping themselves informed about company matters. - Regular attendance at meetings. - Making their own inquiries and not merely relying on the information of others. - Participating in the decision making process. - Directors cannot simply rely on the fact that systems are in place and have an objective duty to be able to read and understand the company's financial statements (ASIC v Healey → honest directors, did not control or oversee the financial statements which were being taken care of by professionals). S 180: - S 180 (1) requires an objective 'reasonable person' test to be applied and clearly sets out the standard of the duty of care and diligence which must be observed by the directors and officers of the company. - Consideration of whether a director has acted reasonably will include a consideration of the company's circumstances and the responsibilities of the director. Business Judgement Rule: - S 180 (2) - Business Judgement Rule (BJR). 1. The director makes the business judgement in good faith for a proper purpose. 1. Has no material interest in the subject matter of the decision (avoids conflicts of interest). 1. Informed thmselves as to the subject matter. 1. Rationally believe the business judgement is in the best interests of the company. S 180 (3): - Defines a business judgement to mean any decision to take or not take action in respect of a matter relevant to the business operations of the company. Insolvent Trading: - Pursuant to s 558G, a director has a statutory duty to prevent the company from trading whilst insolvent. - The director has an obligation to ensure that the company is not insolvent at the time a debt is incurred or they will run the risk of personal liability for debts incurred. The test applied per s 588G will be that of a reasonable person in the circumstances. - Thus, the directors are required to keep themselves informed as to the financial position of the company. Financial and Reporting Obligations: - Fundamental reporting obligations upon a company: - To keep financial records (s 286) - all companies. - To prepare financial and directors' report for each financial year (s 292) - large pty and public companies. - Audited financial reports and obtain auditor's reports (s 301) - large pty and public companies. - Pursuant to s 302, a disclosing entity (definition s 111AC - for example a listed company) must prepare an audited financial report and directors reports half yearly. - Small proprietary companies are not required to prepare annual financial reports unless directed to do so. - By the members (holding 5% or more of the voting shares) - s 293. - By ASIC - s 294. Financial and Reporting Obligations: - The financial reports must: - Comply with accounting standards (s296); and - Give a "true and fair view: of the financial performance of the company (s297). - Directors Reports in listed companies must include details of remunerations matter and directors interests in shares, options, debentures or contracts within the company (s 298 to 300B). - Financial records must be kept for 7 years after the transactions covered by the records are completed. (s 286 (2)). - Records kept in electronic form must be convertible into hard copy (s 288). - A written notice to ASIC is required to notify the whereabouts of financial records kept outside Australia. (s 289). Continuous Disclosure: - Disclosing entities are required to disclose material information in relation to the company's operations or financial position on a continuous basis (ss 674, 674A, 675, 675A). - The requirements of continuous disclosure vary depending on whether the disclosing entity is listed or unlisted. For listed companies the ASX Listing Rules apply. - The continuous disclosure provisions are investor/market focused. - Non-disclosure, misleading disclosure, and selective disclosure are all targeted. Auditor Independence: - There is a general requirement that auditors remain independent of the audited body in the sense that they avoid conflicts of interest - s 324CA. - The Corporations Act sets out examples of relevant relationships that may amount to a conflict - s 324CH. - There is a 2 year waiting period before an auditor can become an officer (take a management role) in a client company - s 324CI; S 324CJ. - A significant role auditor must be rotated after a maximum of 5 successive years of servicing a particular audit client - s 324DA. - Corporations Act Duties (s 307 to s 313). - Forming an opinion whether the financial report. - Complies with AASB (s 296 or s 304). - Presents a true and fair view (s 297 or s 303). - Reporting to members (ss 295 to 297 and s 303). - For listed companies, attending the AGM and providing answers to written questions (ss 250 RA and 250 PA). - Complying with Auditing Standards (s 307A). - Must report to ASIC if there are reasonable grounds to suspect a contravention of the Act (s 311). Auditors Duties: - Duties to the company to use reasonable care and skill. - A contractual duty to the company engaging them. - Tort - relationship of auditor and client give rise to a duty of care towards the client. - Duties to Outsider. - The crucial issue is "proximity". - Case: Esanda Finance v Peat Marwick. - S 185 → use of statutory and fiduciary duties. ASIC can only ask for statutory focused penalties. Week 8 → Members Rights and Company Meetings Members Rights: - 2 Main Sources of Members Rights → - Personal Rights: - Belong to shareholders. - Personal to shareholders. - Enforceable by the shareholders. - Derivative Rights: - Belong to the company. - The problem that exists is the company\'s problem, not shareholders. - Shareholder acquires the company\'s rights and brings proceedings on behalf of the company. Public company → can sell shares if there is an issue. Private → no way out (as you cannot sell easily). Derivative Rights - General Law: - Originally arose as an expectation to the rule in Foss v Harbottle → restricts shareholders in bringing proceedings for the company. - Previously under general law, members had to overcome the rule in Foss v Harbbottle to enable them to bring a derivative action. The rule in Foss v Harbottle had two aspects: - Internal Management Rule. - Proper Plaintiff Rule. - The exceptions to the rule in Foss v Harbottle: - The fraud on the minority shareholders (main exception). - Where personal rights are infringed. - Where actions were not bona fide for the benefit of the company as a whole. - Where members' property is expropriated - Case: Gambotto v WCP → constitution was going to be amended to make them sell their shares. - Where company's property is expropriated - Case: Cook v Deeks → one shareholder was frozen out by the other three creating a situation where business is dragged from the company. Derivative Rights - Statutory Law: - A shareholder's derivative right to bring proceedings for the company at general law (on a case by case basis) is now abolished. - Now a statutory derivative action is available under s 236 of the Corporations Act - this section sets out the right to bring proceedings on behalf of the company. - To succeed under s 236 the shareholder must satisfy the criteria in s 237 as follows:  - The company won't bring the action. - The shareholder must act in good faith. - That the action is in the company's best interests. - The matter is a serious matter. - The shareholder must also rebut the presumptions in the BJR. - (To bring proceedings for the company). Personal Rights A Shareholder Has: - Personal actions are available in the general law and pursuant to the Corporations Act. - Shareholders have various rights: - Contractual rights: - S140 - rights under company's internal rules. - Class rights. - Procedural rights: - Rights to inspect company's book - s247A. - Rights to receive due notice of meeting. - Rights to correct register - s175. - Rights to challenge variation of shares - s246D. - Right to ask questions at meetings. - Right to vote → less power if minority shareholder. - Right to dividend. - Rights under the 'two strikes' rule - s250U. - Personal actions are available in the general law and pursuant to the Corporations Act. - Substantive Protection: - S1322, right to correct a procedural irregularity. - S461, right to apply to wind the company up on grounds of oppression, prejudice or discrimination. - S1324, right to apply for injunction. - S232, deals with company or directors conduct contrary to either the interests of members as a whole; or to a member if they have been oppressed, unfairly prejudiced or discriminated against. Cook v Deeks → prejudice. - S233, members can seek orders which include: winding up the company; modifying the constitution; purchasing shares; appointing receiver. Oppression: - S232 → cases that help to identify what oppression is: - Wayde v NSW Rugby League Ltd → reasonableness of the board\'s decision is a relevant factor to whether it was oppression or not. Western suburban team was kicked out. - Morgan v 45 Flers Avenue Pty Ltd → restricted dividend payments were not considered as oppression. - Sanford v Sandford Courier Service Pty Ltd → minority shareholder had been oppressed due to the self interest of majority shareholders and directors. Non-payment of dividend became oppression. - Scottish Co-operative Wholesale Soc Ltd v Meyer → transferring the business opportunity to another company by majority shareholders was held by the court as oppression on the minoirty shareholders. Members' Meetings: - There are 3 types of members meetings: - Class Meeting → members of a class of shareholders whose rights are challenged can meet to vote on any variation or cancellation (s246B). S254A. - Annual General Meeting (AGM) → - Compulsory for public companies. - A public company must hold its first AGM within 18 months after its registration. - AGM must be held annually in a public company and within 5 months after the end of its financial year (s250N). - Extraordinary General Meeting (EGM) → - Electronic notice of meetings is possible, and meetings may use virtual meeting technology. - s249C - a director can call an EGM. s249G - the court can call an EGM. - Members can call an EGM if: - s249F - members with at least 5% of the votes - members pay. - s249D - members with at least 5% of the votes can request the directors to hold a general meeting. - s249E - if directors don't call meeting as requested by members as in s249D then members can call the EGM and company will pay the cost. Resolutions: - 2 types of resolutions can be made at meetings: - Ordinary Resolutions (more than 50% of vote): - These include → removal of directors, election of directors. - Special Resolutions (at least 75% of vote): - These include → change of company name, change of constitution. Voting Procedures: - Show of hands: - Each member has one vote. - By a poll: - Each member has one vote for each share held (s205E). - A poll may be demanded by: - At least 5 members entitled to vote or - Members with at least 5% of the votes or - The chair (s250L). - Proxy Votes: a member who is entitled to attend and vote at an AGM may appoint a proxy to attend and vote on their behalf. - Proxies can be 'directed' - this is, given specific instructions on how to vote on the resolution, or 'undirected' that is, leaving voting to the discretion of the proxy. - Minutes of Meetings. Quorum: - Dealt with in replaceable rules - s249T. - Unless company specifies its own quorum requirements s249T sets out that the quorum for a meeting of the company members shall be 2 members who shall be present throughout the entire meeting (this is the case for physical or electronic attendance). - A quorum is the minimum number of members required to be present if business to be validly transacted and resolutions passed. Week 9 → Takeovers Financial Services and Markets Takeovers: - About control. A takeover occurs when a company (the bidder) seeks to gain control over another company (the target) by acquiring its shares. - Control over the board (ordinary resolution) - more than 50%. - Control the constitution (special resolution) - 75%. - Total control (tax, admin, etc) - wholly owned (100%). - Central in takeover law is the concept of 'relevant interest'. - S608 → hold the securities, have power to exercise, have power to vote, have power to dispose of the securities. - Restrictions on takeovers: - Corporations Act - S606 - 20% threshold. - Prohibitions on acquisition to ensure fairness to target shareholders. - Unless an exemption applies a person just does not acquire a relevant interest in voting shares above the threshold limit of 20% of the issued capital. - Unless an exemption applies a person must not acquire a relevant interest in voting shares which increases a person's holding to any percentage between 20-90%. - The prohibitions in s606 do not apply if a person has relevant interest in at least 90% of the voting shares. - The threshold is based on relevant interest, not based on ownership. Compulsory Acquisitions: - s661A → Compulsoy Acquisition or Disposal. - Where a bidder (including associates) has a *total relevant interest* (controlling or influencing for regulatory purpose) in at least 90% of the voting shares and at least 75% of the bid is accepted, then a compulsory buy out of the remaining target shareholders is possible. - s662A - minority shareholder not be 'locked in'. - Where a bidder (including associates) has a *total relevant interest* in at least 90% of the voting shares they must offer to buy out the remaining holders of shares. - s664A and s664AA - 6 months rule. - Where a person has a *full beneficial interest* (benefit from financial interests → voting power and value) in at least 90% of the shares in a company they may compulsorily buy out the remaining shares within six months of acquiring that threshold. S12 → prevents too much power from falling onto one individual. Acquisitions Beyond Threshold: - S602: - Excludes from the prohibition in s606 the acquisition of control in an unlisted company with less than 50 members. - S611: - Acquisitions exempt from the s606 prohibitions. - An acquisition under a will or by operation of law. - An acquisition that results from an initial public offering (IPO). - Creeping takeover: a bidder is allowed to acquire up to 3% every 6 months if they hold 19% of the company's shares for a continuous period of 6 months or more. - Permitted means of acquisitions: these will relate to hostile takeovers - and include market, and off-market bids. Permitted means of acquisition: +-----------------------------------+-----------------------------------+ | Market Bid | Off-Market Bid | +===================================+===================================+ | - Procedure outlined in s634 | - Procedure outlined in s632 | | and s635. | and s 633. | | | | | - Listed securities only - | - Listed and unlisted | | takes place on ASX. | securities. | | | | | - Must be full bid (buy all | - Either full bid or partial | | securities in the bid class). | bid. | | | | | - Consideration must be cash | - Consideration can be: | | only. | | | | - Cash or securities or | | | combination of cash and | | | securities. | | | | | | - Most popular and most common | | | due to flexibility. | +-----------------------------------+-----------------------------------+ Takeover Procedure: - Bidder's Statement: - Content requirements in s636. - Identity of the bidder. - Terms of bid. - Details of bidder's intention including: - Matters in relation to the continuation of the business of the target. - Any major changes to be made to the business. - Plans for the future employment of the present employees of the target. - Various reports included in bidder\'s stateemtns from experts or others must be accompanied by a statement indicating the person\'s consent to the use of the information. - Lodged with ASIC. However, ASIC takes no responsbility for its content. - Target's Statement: - Main purpose is to inform target shareholders. - Content requirements in s638. - Directors recommendations. - Must include all information that shareholders and their advisers would reasonably require to make an informed assessment whether to accept the offer under the bid. - Directors of a target company who do not make recommendation in the target\'s statement must given reasons as to why a recommendation is not made. - S640 requires that an expert's report accompany the target's statement if: - The bidder is connected with the target (same directors) or - The bidder is already entitled to not less than 30% of the target's shares. - The expert must report on whether the takeover offer is 'fair and reasonable'. s670A: - Specifically focuses upon takeover situations and prohibits misleading and deceptive statements in takeover documentation. - Imposes criminal and civil liability on certain persons for false or misleading material in documents and statements issued in relation to takeover bids. - Those who may be exposed to the liability during the takeover: - Directors if they prefer their own interest. - Experts who provide reports containing material omissions. Takeovers Panel: - Deals with takeover disputes arising during the bid period. - Applications to the Panel may be made by bidders, targets, ASIC or any other affected party. - The Panel has the power to make declarations of unacceptable circumstances and as a result it can make orders to protect the rights of interested parties, or orders as to the manner in which the takeover proceeds. - The constitutional position of the Takeovers Pnael gas come under scrutiny in the past in a number of cases, however, its ability to make declarations has been confirmed. Financial Services and Markets: - The regulatory scheme in Chapter 7 Corporations Act applies to: - Financial products (securities, managed investments and derivatives); financial investments; financial services; financial risk; financial markets. - Financial service providers must: - Hold a license - s911A. - Comply with disclosure and other obligations. - Not engage in prohibited conduct. - Section 912A sets out general obligations which include efficiency, honesty and fairness; competence; absence of conflicts of interest' dispute resolution systems for retail clients' risk management. Regulating Market Conduct: - The following conduct is prohibited: - Short Selling (s1020B). - Selling securities or other financial products not yet owned or possessed. - E.g. short-sellers sell securities at current price, in the anticipation that the price will fall anf they will be able to buy in at lower prices. - To avoid breaching s 1020B the seller must have an exercisable and unconditional right to vest the securities in the buyer. - Breach of s1020B is an offence (s1311). - Market Manipulation (s1041A) creating an artificial place for trading in financial products on a financial market. - False Trading and Market Rigging (s1041B). - Engaging in misleading or deceptive conduct (s1041H). Insider Trading: - Elements of insider trading (s1043A): - Occurs when a person → possess price sensitive information that is not generally available but if it were generally available, the information would be likely to have a material effect on price. AND: - The person → trades in the share - Trading Offence, procedures someone else to trade in the shares - Procuring Offence, gives the information to someone likely to trade in the share or procure someone else - Tipping Offence. - Information (s1042A) - widely defined. - Information will be generally available where it is readily observable (s1042C). - Information may be readily observable even if no one observed it. - Civil and criminal penalty provisions apply to insider trading and the court may order that the inside compensate persons who have suffered damage as the result of the prohibited conduct. - R v Rivkin: the issue was → did Rivkin have information regarding the securities that was not generally available but if it were generally available would have had a material effect on the price of the securities. - There are expectations to the insider trading provisions such as 'Chinese Walls' where information access is kept separate in large businesses; and there are defences such as establishing that the information was generally available. Bidder statement: Target company statement: Takeover panel: forum for resolving disputes. Foreign investment review board: foreign company is trying to takeover an Australian company.   Week 10 → Insolvency Restructuring Restructing: stops before insolvency goes too far, still has a minimal amount of debt before going into liquidation. Provides economic benefit in the long run. Insolvency: - S95A: a person that is not solvent will be insolvent. - A company (person) is unable to pay its debts and as and when they become due and payable. - Solvency of a company is determined by considering various matters including: cash flow; resources available; industry specific practice including terms of payment. Common signs of financial trouble: - Low operating profits or cash flow from the main business. - Trade suppliers refusing to extend further credit to the company. - Legal action taken, or threatened (tax law, environmental law, creditors, etc). - Market downturn. - Difficulty meeting loan requirements. Pursuant to the Corporations Act there are several ways of dealing with insolvent companies: - Schemes of Arrangement - restructure. - Voluntary Administration - restructure. - Part 5.3B Restructure - restructure. - Receivership - mainly a secured creditor remedy. Secured creditor reinforces its rights, if it does not pay what it is meant to. - Liquidation - company is wound up and deregistered. Arrangements and Reconstructions: - Schemes of arrangement → not fast, court approval for meetings and the scheme itself. - Member's scheme: friendly takeover (reconstructions), arrangements made with shareholders not creditors. Coles Myer and Wesfarmers. - Creditors' scheme: insolvency, arrangements are made with creditors. - Procedural requirements are set out in s411 and s412. - s411(4)(b): court approval is required to initiate a scheme and also for an order that a meeting of creditors be convened. - A copy of the court order approving the scheme must be lodged with ASIC - s411(10). - If a meeting is ordered, the company must send an explanatory statement and other relevant information to those entitled to attend - s412. - Scheme becomes binding if approved by: - Court. - Majority of creditors holding at least 75% of debt. - Examples of how a scheme (or in fact any other insolvency arrangements) may work. - Moratorium - creditors wait for part or all of debt. - Compromise - creditors accept part of debt and/or an installment arrangement is adopted. - Creditors' schemes are rarely used due to: - Complex procedural requirements: - Lengthy documentation. - Separate meetings of various categories or 'classes' of creditors. - Court involvement can result in delays and expenses. - Members' schemes will continue to be a relevant tool in effecting the reorganisation or reconstruction of solvent companies. Voluntary Administration: - Quick to implement. - Efficient process to arrive at outcome. - Not subject to court intervention, intitaition or approval. - Aim of VA to give an insolvent company a chance of survival or, if it is not possible at least to maximise the return to its creditors - s435A. - Who may appoint the administrator? - The board of directors - s436A. - A liquidator or provisional liquidator - s 436B. - A secured party whose security covers the whole or substantially the whole of the company's property - s436C. (Secured creditor). - Qualifications and requirements of an administrator → - Must be a registered liquidator - s 448B. - Must be independent of the company - s 532. - Not owed more than \$5000 by the company. - Not an officer or auditor of the company. - Requirements for registration as a liquidator in Schedule 2 include: - Sufficient experience at a senior level. - Completion of a course in commercial law at tertiary level. - Appropriate insurance cover. - Liability of an administrator arising from: - Breach of general law or statutory duties: - Administrators are in fiduciary relationships with the company and thereby owe fiduciary duties to the company. - Pursuant to s 9, an administrator is an officer of the company and thereby has the duties of officers. - Contracts entered during administration: - Administrators are personally liable for certain debts incurred during administration including brought goods, property hired, leased and or used by the company, or borrowed money - s 443A. - Administrators will also be liable for lease payments (unless gives notice of non-exercise of right within 5 business days of appointment) - s 443B. - The administrator has a right of indemnity out of the company's property for these amounts - s 443D. - Effect of the administration: - During the period of administration, there is moratorium - 'freeze' or 'stay'- on creditors bringing debt recovery actions, winding up proceedings, and other claims - s 440A to s 440G. - However, there are expectations: - A secured creditor with a security interest in the whole or a substantial part of the company's property that enforces within the first 13 business day's of administration (decision period - s9) is not bound by the stay - s441A. - A secured creditor that enforces before the administrator is appointed is not bound by the stay - s441B. - A secured creditor with security over perishable property is not bound by the stay - s441C. - Powers of the administrator: - Takes control of the company. - Can exercise all of the functions that the company or any of its officers could perform - s437A. - An agent of the company - s437B. - Wide powers of investigation - s438A. - Limitations on administrators' power: - Administrators cannot destroy property rights that arose before administration except where expressly authorised by statute. - During administration, the company falls under the control of the administrator and as a result the directors ability to exercise their functions and powers, and to enter transactions, is limited. - Directors may perform company functions only with the administrator's written consent - s198G. - Transactions entered by directors will be void unless the administrators written consent was first received, or unless entered into pursuant to an order of the court - s437D. - Directors who breach these provisions may be ordered to pay compensation - s437E. - Schedule of administration: - First meeting in administration → - Takes place within 8 business days after the commencement of administration - s436E. - The administrator convenes the meeting by giving written notice to the creditors and by publishing the notice of the meeting in the prescribed manner - s 436E (3). - At this meeting the creditors appoint a committee of inspection. - Meeting to decide the company's future: - To be held within 5 business days before, or within 5 business days after the 20 business day 'convening period' - s439A. - The outcome of the meeting is a choice to be made from 3 options (s 439C): - Deed of Company Arrangement - this is the focus of VA and is an arrangement between the company and creditors regarding debt owing - it enables a restructure. - Winding Up - appointing a liquidator with wide powers of recovery may be an alternative solution for creditors. - Administration simply ends without either of these options being chosen. Part 5.3B Restructure: - Criteria: - Insolvent companies seek to retain control of its business while repaying existing debts. -  To use 5.3B a company's total liabilities must not exceed \$1 million. - Directors appoint a restructuring practitioner. - Restructure is prohibited if current director has been a director of another company under restructure or of a company that has entered a simplified liquidation process in the last 7 years. - Directors retain control of a company's business but must assist restructuring practitioners. - Once restructuring in place there is a moratorium in relation to claims against the company. - Transactions outside of normal company business require restructuring practitioners consent and be in creditors interest. - Directors have some protection from s588G (insolvent trading) - such as, if debt incurred in ordinary course of business or with restructuring practitioners consent. - Phases: - During restructure phase restructuring practitioner assesses company position and creditor entitlements. - Next phase - restructuring plan - must be proposed within 20 business days from start of restructure. - Restructuring plan can be approved by majority of creditors (by value) and binds company, officers, members, and creditors. - Restructuring plan terminates when company fulfills obligations, or court orders. Receivership: - 2 ways receivers are appointed. - By court: - S1323 - grounds of appointment where an investigation is being carried out by ASIC. - S233 - where a shareholder succeeds in an action for oppression. - By secured creditors who wish to enforce their security. - Receivers must be registered liquidators - s418. - A receiver is an agent of the company. - Receivers' power arise from: - S420. - The security instrument (or the court order) under which the receiver has been appointed. - Receivers' Duties: - General law and statutory law → - Owes duties to the secured creditor who appointed them. - When appointed by the court a receiver takes on a fiduciary relationship with the company. - Receiver is an officer for statutory provisions. - S420A - in relation to the sale of company assets the receiver is under a duty to sell at market value or best price available. Week 11 → Liquidation Insolvent Trading Types of Winding Up: - Compulsory Winding Up - Court-orded winding up. - 2 types: 1. Winding up in insolvency (ss 459A, 459P). 1. Winding up on grounds other than insolvency - e.g. oppressive conduct (s461). - Voluntary Winding Up - The company initiates this process without resource to the court. - 2 types: 1. Members' voluntary windingup for a solvent company. 1. Creditors' voluntary winding up for an insolvent company (including simplified liquidation process). Members Voluntary winding up → - Inititated by shareholders of the company who pass a special resolution (75%) to wind up the company - s491. - Directors make a written declaration of solvency that the company will be able to pay all debts of the company in full within 12 months after the commencement of winding up - s494. - Appoint liquidator by ordinary resolution, Power of directors cease and liquidator takes control - s495. - Company files with ASIC a copy of resolution within 7 days and arranges for notice to be published (ASIC insolvency notices website) - s491. Creditors Voluntary winding up → - May rise where directors are unable or unwilling to complete declaration of solvency. - Liquidator is appointed by the company in general meeting for purposes of winding up and distribution - s499. - At the meeting to decide the company's future under a voluntary administration (s 439A) the creditors vote to wind up the company - s439C. - Includes simplified liquidation process. Simplified Liquidation Process → - Provided eligibility criteria is met, simplified liquidation is available for smaller companies. - Criteria:  - Liquidator gives creditors summary company position.  - Directors declaration eligibility criteria met cannot be paid in full in 12 mlonths. - \< 1M liabilities. - Not undergone restructuring in the last 7 years. - Once a special resolution to wind up is passed, the liquidator has 20 days to adopt the liquidation process, and must give members and creditors 10 business days notice before adopting a simplified liquidation process. - Simplified liquidation will not be available where 25% by value of creditors oppose. - Simplified liquidation involves reduced investigation, rpeorting and distribution requirements - thereby most cost effective. - Liquidators report s553 not required. - Meetings reduced. - Time period liquidators can look for unfair preferences (relation-back period) reduced from 6 to 3 months (transaction not voidable unless over \$30k). Compulsory Winding Up → - S95A, a person is solvent if they can pay all their debts as and when due. Insolvency cannot occur. - Parties who apply to the court include: creditors, company, members, ASIC, directors. - Where application is by ASIC, leave of the court must be sought → where the court is satifised that there is a prima facie case that the company is insolvent - s459P (3). - Where application is by a creditor based on a statutory demand there are 3 elements to be satisfied: - Court has jurisdiction → registered at ASIC. - Debt \> the statutory minimum (\$4000 or other). - Company is insolvent. - Most common presumption of insolvency is the company failed to comply with a statutory demand. s459C(2). - Key elements of 'statutory demand' are as follows: - Demand must be in writing - s459E(2)(d). - I tmust relate to a debt which is due and payable. - The amount of the debt is at least the 'statutory minimum'. - The demand must be referred to the debt, and require payment within the relevant period (in most cases 21 days) - s459F. - If the debt was not a judgement debt, the demand must be accompanied by affidavit that verifies that debt is due and payable by the company - s459E. - Compulsory winding up by the court on the grounfd other than insovlency (s 461). - Oppression of members. - The company has no members. - ASIC report sthat the company should be wound up. - The court is of the opinion that the company should be wound up. - The company failts to commence business within one year of formation or suspends operations for a year or more. - The company passes a special resolution that it be compulsorily wound up by the court. Liquidators: - Corps Act (Schedule 2) requires registered liquidators to have appropriate academic and professional qualifications. - In certain circumstances e.g. s532, a person must not seek appointment as a liquidator wihtouth leave of the court. - Powers include: - Locate and take possession of the company\'s assets s478. - Sell and collect proceeds from assets. - Work out what debts are payable by the company, and what valid claims exist against the company. - Bring legal proceedings, representing the company in legal actions, if necessary. - Distribute the proceeds of the realised assets. Liquidators - Distribution of Funds: - 1\. Secured creditors. - 2\. Priority creditors. (In order) Expenses of recurring property, costing of the application to wind up, liquidators fees, employee entitlements. - 3\. General unsecured creditors. - S555, sets out that except as otherwise provided for in the Corporations Act an equal fair distribution of the property among creditors is required, if cannot be paid in full, then paid proportionately. Pari passu principle and applies to distribution available to satisfy unsecured creditors claims. - Following the compilation of final accounts the company may be deregistered. Liquidators - power to recoup funds: - Liquidator (on the company's behalf) is able to claim compensation form any director who has breached their fiduciary duty. - Liquidator can target directors of the comapyn personally where there is insolvent trading (s558G) - the amount owing becomes a debt due to the company by the director. - Liquidator is able to recover (claw back) assets using the 'voidable transactions' provisions. Voidable Transactions: - Voidable transactions is a transaction entered into by a company on the period leading up to its winding up. - If the liquidator is successful in finding a voidable transaction the court has power to make orders including: - An order 'undoing' the transaction. - An order that money be paid to the company equal to the amount of the voidable transaction - s588FF. Defences to voidable transactions: - Protection available to third parties under s588FG. - No order which material prejudices a person's right or interest will be made: - If the person received no benefit benefits because of the transaction or - If he or she did receive a benefit. - It was received in good faith and: - When received the person had no reasonable grounds for suspecting that the company was insolvent or would become insolvent: - A reasonable person in the person's circumstances would have had no such grounds for so suspecting. - As concerned creditor defeating transactions, safe harbour provisions mat apply s588GA. Insolvent Trading: - Proceedings can be brought by: - The liquidator s588, - here the amount is a debt owing to the company - note, although not common, in some cases the liquidator may give consent to a creditor to bring proceedings and here the debt is due to the creditor. - ASIC - s588G is both a civil and criminal penalty rpovision (where dishonesty is found). - Insolvent traidng (s588G): - Directors may be personally liable for a debt incurred by the company if the company is insolvent by incurring the debt and at the time there are reasonable grounds for suspecting the company is insolvent or would become insolvent. - There is a breach of s588G if the director is aware there are grounds for suspecting insolvency or a reasonable person in a like position in a company in the company's circumstances would be aware. Defences to insolvent trading (s588H):  - Director had reasonable grounds to expect, and did expect, solvency. - Reliance on a competent and reliable perso. - Absence of management when the debt was incurred due to illness or other good reason. - Director took reasonable steps to prevent debt being incurred. Safe Habour Defence: - s588GA provides protection from the appliation of insolvent trading in relation to a particular debt where: 1. When the director begins to suspect the comapny may be or become insolvent they take a course of action reasonable likely to lead to a better outcome (that is, better than appointment of an administrator or liquidator) and 2. The particular debt is incurred directly or indirectly in connection with the course of action. - One of the factors relevant to determining whether the director's couse of action is reasonably likely to lead to a better outcome is whether advice was obtained from a suitably qualified entity. - Where directors are involved in a Pt 5.3B restructure - protection from s588G can also be found in s588GAAB and s588GAAC.