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LLH305 Notes

LLH305 Exam Notes

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Corporate law (LLH305)

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Queensland University of Technology

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Week 1: Company Characteristics

Company Structure Classifications

 INTRO: All companies must be one of the following types (s 112(1)):  Proprietary Companies  Limited by shares  Unlimited with Share Capital  Public Companies  Limited by shares  Limited by guarantee  Unlimited with share capital  No liability company  Public Company o A company that is not a proprietary company: s 9.  CONVERSION  can convert from a private company: s 162 – 165. o Naming conventions  must use the word ‘ltd’ or ‘limited’ in its name: ss 148(8), 149  Note exemptions for registered charities with approval: ss 150 – 151. o Classifications:  Listed  listed on a prescribed financial market operating in Australia: s 9.  Five financial markets are prescribed: CR 1.0.  This gives companies increased ability to raise capital  Listing Rules apply o detailed disclosure and reporting requirements (eg s300A) o governance requirements (eg ASX Listing Rule 4.10) o Enhanced shareholder protections (eg ASX Listing Rule 7)  Unlisted

 Proprietary (Private) Company o KEY RESTRICTIONS  #1: Must not have more than 50 non-employee shareholders (s 113)  Employee shareholders are/were an employee of the company or its subsidiary at the time they purchased shares in the company: s113(2)  Joint shareholders are counted as one person: s113(2)(a)  Shareholders who acquired their shares under a crowd- sourced funding scheme (‘CSF’) are not counted towards the 50 shareholder limit: s113(2)(c)  #2: Prohibited from engaging in any fundraising activity that would require disclosure to investors under Ch 6D (i., the issuance of a prospectus): s 113(3). Exceptions include:  Offering shares to existing shareholders or to employees of the company or of its subsidiary: s113(3)(a)  Making a CSF offer: s113(3)(b)  ASIC can compel conversion if a proprietary company fails to comply with these restrictions: s 165. o There are two further classifications (s 45A):  Large – a proprietary company which is not a small proprietary company: s 45A(3).  Small – a proprietary company which satisfies two of the following (s 45A(2)):  i. Consolidated revenue for the financial year of <$50m.  ii. value of consolidated gross assets at end of financial year is <$25m.  iii. Company/group has <100 employees at end of financial year.

 Unlimited liability o There is no limit on the liability of members. If the company is unable to pay its debts, the members are personally liable: s 9. o There are two key reasons why a business would choose this form of liability structure:  i. Rules may allow for incorporation only as an unlimited liability company (e. law and accounting firms).  ii. There are significant restrictions on how limited liability companies can behave, particularly in regard to reduction of share capital; unlimited liability companies can reduce share capital without restriction: s 258A.  No liability o Mining companies only: s 112(3). o No liability companies must have the ability under their constitution to call on members to pay additional funds to the company based on their shareholding (“a call on shares’”): s 112(2), 254M.  Members not obliged to repay, but they may have their shares forfeited at the option of the company: s 254Q. o Must have NL or No Liability at the end of their name: s 148(4). o A no liability company must have a share capital, and a constitution stating (s 112(2)):  The sole objects of the company are mining purposes; and  The company has no contractual right to recover unpaid calls on shares.

Advantages and Disadvantages of Sole Proprietorships

 PERCEIVED Benefits o Simple administration o Little if any regulation in relation to the structure of the business (but note there may be industry specific regulation) o All profits go to the owner (no shareholders)

o Flexible o No real set up costs other than ABN and business name. o Business and person are one and the same.  PERCEIVED Disadvantages o As the doctrine of separate legal entity (see below) does not apply, the owner is on the hook for all liabilities of the business.  Debts  Employee entitlements  Fines etc o Taxation at personal tax rates (c/f corporate tax rates). o All profits made in any financial year will be taxed as if received (can’t retain profits in the business) o Limited to loan finance if need to raise cash as no way of issuing shares.

Advantages and Disadvantages of Partnerships

 Perceived ADVANTAGES o Minimal set up costs or administrative burden. o More regulation than a sole trader but less than a company. o The partners can share control and ownership o The tax treatment can be beneficial and generally good opportunities for tax planning. o Partners are not employees. Superannuation contributions and workers’ compensation insurance are not payable for partners. o Partners owe each other fiduciary duties, much like directors of a company.  Perceived DISADVANTAGES o No separate legal entity so each partner is liable for debts and liability o Disputes between partners can arise, particularly in respect of profit share and business decisions so a good clear partnership agreement is essential. o Changes of ownership can be difficult and generally requires a new partnership to be established (i. when one partner leaves or another joins, there is strictly speaking a new partnership). o Relies a lot on trust (one partner can bind the partnership). o Not suitable if the business venture is high risk.

Advantages and Disadvantages of Commercial Trusts

 Advantages o Fundraising from public can be possible

o Interests are typically not freely transferrable o No perpetual succession o Expense of complex commercial contracting – no body of law to serve as default rules.

Advantages and of a Company

 Advantages o All companies are separate legal entities o All companies accommodate the separation of ownership and management o All companies come with default rules for regulating their internal and external affairs o All companies have unique ways that they can raise capital (fundraising) o All companies have perpetual succession o Companies come pre-packaged with an array of different types of liability, including some with limited liability. o Shares in limited liability companies are generally freely transferrable. o There are a variety of corporate forms available – choice among them makes it possible to run large and small commercial enterprises via a corporate form. Among these are corporate forms suitable for:  all sizes of businesses, including one person businesses  businesses seeking to keep control closely held (eg within a family)  businesses that want to keep their financial affairs reasonably confidential  businesses that want to raise funds from an unlimited number of investors. o Companies are taxed at a flat rate. This is designed to be an attractive feature of incorporation, encouraging economic activity. In practice:  the distribution of profits to investors via dividends, links company and personal income tax systems.

 the corporate flat rate can be either an advantage or disadvantage compared to other business forms.

 EFFECTS OF REGISTRATION

o Legal Existence:  A company comes into existence as a body corporate at the beginning of the day on which it is registered: s 119.  A company ceases to exist on deregistration: s 601AD(1).  The company continues to exist even if its members die or resign. o Powers:  A company has the powers of an individual and all the powers of a body corporate, including the power to (s 124(1)):  Issue & cancel shares in the company;  Issue debentures;  Grant options over unissued shares in the company;  Distribute any of the company’s property among the members, in kind or otherwise;  Give security by charging uncalled capital;  Grant a circulating security interest over the company’s property;  Arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction;  Do anything that it is authorised to do by any other law (including a law of a foreign country) o Capacity:  A company has the legal capacity of a natural person (s 124).  It can sue and be sued in its own name.  Certain people have the power to bring an action on behalf of the company too: ss 236-242. Previously the decision to sue in the name of the company was a decision for the directors (Foss v Harbottle) – this was problematic where the directors were not acting in the best interests of the shareholders.  It can own and dispose of property: Macaura v Northern Assurance.

 How does the doctrine of separate legal personality work in practice? o Companies can enter contract with members: Lee v Lee’s Air Farming Ltd [1961] AC 12  FACTS: Lee ran a business and later formed a company to conduct the business. Lee became the governing director of this company. All the issued shares in the company were held by Lee bar one which was held by Lee’s solicitor as nominee for Lee. Lee was killed when the aeroplane he was using to topdress crashed. His wife made a claim on a workers compensation insurance policy that the company had taken out. Lee was named as an employee in the policy. The insurer rejecting the claim on the basis that Lee controlled the company, he could not therefore be an employee of the company.  HELD: The company was a separate legal entity separate from its members, directors and founders. The Privy Council disagreed. The company was a separate legal entity, separate from its members, its directors and its founders. This was a clear application of the decision in Saloman’s case, and here the notion of the company being a separate legal entity worked in favour of the individual in control of the company. o Members only have an interest in the company by virtue of their membership. They do not have a proprietary interest in property owned by the company: Macaura v Northern Assurance Co Ltd [1925] AC 619  FACTS: Macaura sold certain property to a timber company he had formed. The property, which was insured in Macaura’s own name was subsequently destroyed. Macaura made a claim on the insurance policy. The insurance company denied the claim, arguing that Macaura had no insurable interest in the property.  HELD: Once Macaura sold the property to the company, the company owned the property. For the purposes of insurance, this meant that it was the company and not Macaura who had an insurable interest in the property. To some extent the difficulties presented in Macaura have been overcome by insurance legislation in Australia. o Companies are responsible for their own actions, even where the company commits a criminal offence: Hamilton v Whitehead (1988) 166 CLR 121  It is possible for one person to commit the same act and for that act to amount to an offence against the Corporations Legislation committed by the company and for the same person to be found to be an ‘accessory knowingly concerned in the company’s offence’. This case is

o Uncommercial Transactions (s 588FB) – where the company transacts with a related party (shareholder, director, etc) but not on commercial terms.  E. selling assets below market value. o Employee Entitlements – where a company enters into an arrangement which means that employees will not get the benefit of their entitlements. o Security Interests in Favour of an Officer (s 588FP) – where an officer provides a loan to the company and takes a security interest, and with inside knowledge that the company is about to become insolvent enforces their security interest ahead of other creditors. o Financial Assistance (ss 260A, s260D) – there are limits on the assistance that companies can give to potential investors.  COMMON LAW: The veil will be lifted at common law in the following scenarios: o Fraud: Re Darby. o Avoidance of legal obligations: Gilford Motor Co v Horne. o Involvement in directors’ breach of duty: Green v Bestobell. o Sham  ie the company is being used as a sham as a ‘front’ to ‘mask’ the real operation: Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners  “A ‘sham’ is.. that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.”: Sharrment Pty Ltd v Official Trustee in Bankruptcy  Case Notes o Green v Bestobell  LIFTING THE VEIL – COMMON LAW – INVOLVED IN BREACH – COMPANY RECIPIENT OF PROFIT  Green was state manager of Bestobell. He became aware B was planning a tender for construction works. He then set up own company which submitted its own tender and won the contract.

 Held: Court held G breached fid duty to B. In addition, as his company had knowingly participated in the breach, the company was liable to account for the profit. o Guilford Motors v Horne LIFTING THE VEIL – COMMON LAW – AVOIDING OBLIGATIONS – NEW COMAPNY  Horne was appointed MD of Guilford for 6 years. Agreement was that H would not solicit or entice customers away for the period of his appointment, or after its termination. 3 years later he resigned, and set up his own company. H then started soliciting G's customers away.  Held: Court granted an injunction against H and the new company, even though the company itself was not party to the original employment contract. This was because the company was a 'sham' set up to avoid liability for a breach of contractual obligations. o Re: Darby  LIFTING THE VEIL – COMMON LAW – FRAUD – QUARRY LICENCE  D formed a company which purchased a licence to work a quarry. He then floated another company (WSL) which issued shares to the public. D then sold his company's licence to WSL for an overinflated price. WSL became insolvent. Liquidator argued that D should be personally liable for the secret profit he made on the licence sale and that he was in breach of his duty as a promotor of WSL. D argued that it was his company that made the profit, not him (tried to use corporate veil).  Held: Court lifted corporate veil because WSL was formed solely for the purpose of perpetrating the fraud.

Corporate Groups

 Relations Between Companies  QUESTION: Is Company A a subsidiary/holding company of Company B? Are companies A and B related? o 1. Holding/Parent Company – in relation to a body corporate, a holding company is a body corporate of which the first body corporate is a subsidiary: s 9 def. o 2. Subsidiary Company – a body corporate will be a subsidiary of another company if the other company (s 46):  a. Controls the composition of the subsidiary’s board (s 46(a)(i)); or

o INTRO: Each company in a corporate group is a separate legal entity, meaning that each is not liable for the others’ debts. This principle can be contrary to commercial reality: Qintex v Schroders. o DIRECTORS’ OBLIGATIONS: Directors in corporate groups cannot disregard their duties to their individual companies, even where their actions provide a benefit for the group as a whole: Walker v Wimborne. o PROFIT SHARING: The profits one on company within a group are not available to another company within the group for the purpose of paying dividends: Industrial Equity v Blackburn. o LIFTING THE CORPORATE VEIL: A court may hold a holding company liable for the debts of the subsidiary where:  The transaction is for the benefit of the company and the group as a whole: Equiticorp v Bank of NZ.  A subsidiary has acted as agent for the holding company: Smith, Stone & Knight v Birmingham Corp.  There is liability in tort and the parent company has substantial control over the subsidiary’s daily activities: CSR v Young.  Further case notes o Smith, Stone & Knight v Birmingham Corp  LIFTING THE VEIL – AGENCY – LAND ACQUISITION CASE  BC (LGA) sought to compulsorily acquire land owned by SSK. To outsiders, the land appeared to be owned by Birmingham Waste. BW was a wholly owned subsidiary of SSK. Under legislation of the time, SSK would not have been entitled to compensation for the land acquisition. SSK argued that in fact, it was the occupant and tenant of the land, and BW was merely acting as its agent.  Held: Court agreed, saying that if 6 factors are present, the separate legal identity of the subsidiary from the holding company will be disregarded

Directors and Officers

 What is an officer? o Statutory definition (s 9):  (a) A director or secretary of the corporation; or  (b) A person  i. Who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or  ii. Who has the capacity to affect significantly the corporation’s financial standing; or  iii. In accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation; or  (c) A receiver, or receiver and manager, if the property of the corporation;  (d) An administrator of the corporation; or  (e) An administrator of a deed of company arrangement executed by the corporation; or  (f) A liquidator of the corporation; or  (g) A trustee or other person administering a compromise or arrangement made between the corporation and someone else. o ASIC v King [2020]  FACTS: King was former CEO and director of the company. He ceased formally in February 2007. ASIC alleged that:  after this time King directed that the company use funds from one of its subsidiaries to reduce company debts, and  the deputy CEO and an executive director of the subsidiary continued to report to King in circumstances where they were accustomed to acting in accordance with King’s directions.  HELD: The definition of ‘officer’ in s9 should be read broadly. Paragraph (a) captured people appointed as officers. Paragraph (b) applied beyond formal office holders. It captured people involved in

 ELIGIBILITY

o Directors must be over 18 and not disqualified from managing corporations: s 201B(1).  Appointment of Directors o ON INCORPORATION  The first directors are named in the application for registration: s120(1).  They must have consented in writing: ss117(5)  Company must retain that consent: 201D. o SUBSEQUENTLY  The company’s internal governance rules address how directors are chosen.  Casual vacancies can arise in a variety of ways: death, retirement, resignation or unable to continue: s201H.  After registration appointment is made by resolution in a general meeting of members: s201G. It may be possible for directors to be appointed by other directors: s201H (replaceable rule).  Directors must consent in writing to act as a director: s201D.  In public companies, directors must be appointed individually as a general rule: s201E  SOLE SHAREHOLDER COMPANIES  Replaceable rules do not apply to single director/single shareholder companies (s 135(1)) – in such a company, the sole director can appoint another director via the procedure in s 201F.  ASIC must be notified whenever a director is appointed: s205B.  Resignation and retirement o Resignation & Retirement: If your company’s internal governance rules set out a process for retirement/resignation, then you must follow that procedure.  Note s203A (replaceable rule) – requires notice in writing to the company at its registered office. ASIC must be notified: s203AA.

o SUBJECT TO THE LAST DIRECTOR RULE:  Resignation is not effective if it would leave the company with no director: s203AB.  The rule does not apply if your resignation as the last director takes effect on the winding up of the company.  If ASIC is notified within 28 days, then the resignation is effective on the date you actually resigned: s203AA. If you miss that deadline, your resignation takes effect on the date ASIC is notified.  Removal o Proprietary companies: directors can be removed by resolution removing a director from office and appointing another director instead: s203C.  Such a resolution is void if it offends the last director rule. o Public companies: directors can be removed by resolution despite anything in the company’s internal governance rules, shareholder agreements etc – s203D.  Directors in public companies cannot be removed by other directors: s203E.  Other officers o Managing directors:  A company can appoint a managing director: s201J.  The managing director can be delegated any powers of the board: s198C.  The managing director usually manages the daily business of the company. It is usual for some matters to be reserved to the board: Shirlaw v Southern Foundaries (1926) Ltd [1939] 2 KB 206. o Company secretary:  Secretaries are officers of the company.  Proprietary companies need not have a secretary.  Public companies must have at least one secretary ordinarily resident in Australia: s204(1).

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LLH305 Notes

Course: Corporate law (LLH305)

255 Documents

Students shared 255 documents in this course

University: Queensland University of Technology

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Week 1: Company Characteristics

Company Structure Classifications

INTRO: All companies must be one of the following types (s 112(1)):

Proprietary

Companies

Limited by shares

Unlimited with

Share Capital

Public

Companies

Limited by shares

Limited by

guarantee

Unlimited with share

capital

No liability company

Public Company

oA company that is not a proprietary company: s 9.

CONVERSION  can convert from a private company: s 162 – 165.

oNaming conventions  must use the word ‘ltd’ or ‘limited’ in its name: ss

148(8), 149

Note exemptions for registered charities with approval: ss 150 – 151.

oClassifications :

Listed  listed on a prescribed financial market operating in Australia:

s 9.

Five financial markets are prescribed: CR 1.0.02A.

This gives companies increased ability to raise capital

Listing Rules apply

odetailed disclosure and reporting requirements (eg

s300A)

ogovernance requirements (eg ASX Listing Rule 4.10.3)

oEnhanced shareholder protections (eg ASX Listing Rule

Unlisted