Legal Regulation of Business Structures

Assignment Brief

ACC520 Legal Regulation of Business Structures

QUESTION 1:

Kody and Ryder met whilst studying together at USC and have just graduated. Together they have decided to go into business selling unique, hand-made crafts and other gifts online. They decided to start a company (which they want to register with the name “Incredible Gifts Pty Ltd”) to source, market and sell these products online.

Ryder, keen to get started, approaches Melanie, a well-known local craft artist. Ryder negotiates a 12 month contract with Melanie for the design and provision of a range of unique hand-made gifts, for sale exclusively by Incredible Gifts. The contract is signed by both parties on the 26th April 2018 and provides for a monthly payment of $5,000.

When Kody and Ryder go to register Incredible Gifts Pty Ltd on the 2nd of May 2018, they discover that the name has already been registered. As such, they register the company Astounding Gifts Pty Ltd instead. Kody and Ryder are listed as the two company directors, and Astounding Gifts enters into an employment contract with Salman to act as the company’s accountant. Kody and Ryder each hold 45% of the company’s shares and Salman is given a 10% shareholding. A. Salman, what the process for altering a company constitution is, and whether she can prevent the inclusion of the clause allowing the directors to expropriate her shares?

On the 12th of May 2018, Kody and Ryder convene their first directors’ meeting. Kody is pleased to hear that Ryder has already managed to sign the exclusive supply contract with Melanie and they begin paying the $5,000 per month.

On the 10th of July 2018Kody and Ryder find out that Salman has just accepted an accounting position with their competitor Incredible Gifts Pty Ltd and is trying to encourage Melanie to provide her hand-made gifts to Incredible Gifts instead. Kody and Ryder immediately call a members’ meeting and pass a resolution that alters Astounding Gift’s constitution to provide that directors may determine that the company can buy back shareholdings of less than 12% at their discretion. Astounding Gifts also refuse to continue to pay Melanie the monthly payments.

Advise:

1. Salman, what the process for altering a company constitution is, and whether she can prevent the inclusion of the clause allowing the directors to expropriate her shares?
2. Melanie, what recourse, if any, she has for the non-payment of her monthly payments for the remainder of her 12 month contract?

QUESTION 2:

Chip-Eze Pty Ltd is a company involved in two business: the manufacture of potato crisps and other snack foods, which has been making a loss in the past few years, and the manufacture of frozen potato chips and other foods, which is reasonably profitable. The directors of the company are Michaela, Jordon and Marianne who each own 25% of the shares in the company. The remaining 25% of the shares are owned by five outside investors (Ayub, Saeed, Donte, Neeve and Faizah).

Chip-Eze have been having financial difficulties, with a number of outstanding payments to creditors, particularly the suppliers of the snack food side of the business. At a board meeting on the 1st of August 2018, Michaela proposes a resolution to incorporate a separate company, Freeze Me Pty Ltd and to transfer the profitable frozen foods business to this company. The resolution is unanimously passed.

On the 10th of August 2018, Freeze Me Pty Ltd is incorporated, the assets related to the frozen food business are transferred to it and all the customers and suppliers are updated with the new details.

On the 6th of August, Jordon had been approached by Faizah who had asked if she could purchase additional shares in Chip-Eze Pty Ltd. Jordon agreed to sell her an additional 5% of the shares himself, and they completed the transaction on the 8th of August.

Upon application by creditors who had not been paid, the court orders that a liquidator be appointed and Chip-Eze Pty Ltd be wound up in insolvency. Archibald is then appointed as liquidator

Advise:

1. Archibald whether the directors of Chip-Eze Pty Ltd have breached s181 of the Corporations Act 2001 (Cth) or their equivalent equitable duties and what penalties or remedies might be applicable
2. Faizah whether she has an action against Jordon for breach of directors’ duties for selling her the shares in Chip-Eze Pty Ltd just before it was going into liquidation.

ASSESSMENT CRITERIA

As noted in the course outline, the assessment criteria for this assessment task are:

1. Demonstration of knowledge of the law, as evidenced by accurate statement of relevant legal principles;
2. Demonstration of understanding of the law, as evidenced by cogent and coherent application of legal principles to the fact situation as stated;
3. Demonstration of requisite academic communication skills, as evidenced by logical structure of arguments, appropriateness of conclusions, accuracy of citations (legal referencing) and academic referencing and use of accurate and appropriate expression.

Sample Answer

Legal Regulation of Business Structures – Assignment Report

Question 1: Astounding Gifts Pty Ltd

Introduction

The case of Astounding Gifts Pty Ltd involves complex issues regarding company constitution alterations, director powers, and contractual obligations. The primary legal considerations concern the rights of shareholders, the process for amending a company’s constitution, and the contractual remedies available to third parties such as Melanie.

Salman – Altering the Company Constitution and Protection of Shareholding

Under the Corporations Act 2001 (Cth), a company may alter its constitution by passing a special resolution, which requires a 75% majority of members present and entitled to vote (s136(2)). Notice of the resolution must be given to all members, and the alteration takes effect once lodged with the Australian Securities and Investments Commission (ASIC).

Salman, holding a 10% shareholding, cannot unilaterally prevent the alteration if Kody and Ryder, holding 90% collectively, pass the special resolution. Equity does, however, recognise protections for minority shareholders where amendments are oppressive or unfairly prejudicial (s232). A clause allowing directors to expropriate shares could be challenged if it is unreasonable, discriminatory, or intended to target a minority shareholder. Case law such as Foss v Harbottle (1843) and Gambotto v WCP Ltd (1995) establishes that amendments cannot be used to defeat the legitimate interests of minority shareholders.

In this scenario, although the resolution is legally valid due to the majority shareholding, Salman could seek legal remedy under the oppression provisions if the buyback clause is applied in a manner designed to force her out unjustly. Courts have discretion to invalidate or restrain enforcement of constitution clauses that constitute unfair prejudice.

Melanie – Breach of Contract

Melanie has a 12-month contract with the company for exclusive provision of hand-made gifts, specifying monthly payments of $5,000. The cessation of payments constitutes a breach of contract, giving Melanie several potential remedies:

1. Specific Performance – Unlikely in commercial contracts involving ongoing service, as courts rarely enforce personal service contracts.

2. Damages – She may claim damages for the loss of the remaining contractual payments under common law contract principles. The amount would typically be the unpaid monthly sums until the end of the 12-month term.

3. Injunction – An interlocutory injunction could prevent the company from diverting her services to competitors, though this depends on the court’s assessment of enforceability and practicality.

Given that the company has acted in bad faith by refusing payments while simultaneously seeking to benefit from Melanie’s designs, she is likely entitled to full recovery of unpaid amounts and may claim interest and legal costs.

Continued...