CORPORATE LAW EXAM STUDY GUIDE – MLL221

CORPORATE LAW EXAM STUDY GUIDE – MLL221 NOTE!!!  TOPICS 1-7 ARE NOT EXAMINABLE! Power to legislate given to the Commonwealth Parliament under s51(xx) of Australian Constitution (power not given to states) Topic 1/2 ...

CORPORATE LAW EXAM STUDY GUIDE – MLL221 NOTE!!!  TOPICS 1-7 ARE NOT EXAMINABLE! Power to legislate given to the Commonwealth Parliament under s51(xx) of Australian Constitution (power not given to states) Topic 1/2 – Regulatory Framework + Registration Quest for Cth Control Corporations Act 1989 (Cth) Cth legislated independently of the States to introduce a national scheme NSW v Cth (1990) • Does s.51(xx) of the Constitution grant the Commonwealth the power to make laws in relation to the ‘incorporation’ of companies? • s.51(xx) empowers the Cth Parl to: – “make laws ... with respect to ... Foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth” • Majority of the High Court (6:1) – The word ‘formed’ is used in the past tense to refer to companies that have already been incorporated. – This means the Commonwealth can not rely on s.51(xx) to make laws about bringing new companies into existence (i.e. the process of incorporating companies) – “The power conferred by s.51(xx) to make laws with respect to artificial legal persons is not a power to bring into existence the artificial legal persons upon which laws made under the power can operate.” (para 8) 1991 Cooperative scheme – Corporations Law • Cth amended the unconstitutional Corporations Act 1989 – called the ‘Corporations Law’ • Each State enacted legislation which adopted the Corporations Law to be its Corporations Law • Cth authorised the ASC (now ASIC) to exercise powers conferred by state legislation • Cross-vesting of jurisdiction in corporations law matters in the Fed Ct and state Supreme Courts Re Wakim (1999) • HC held the cross vesting of jurisdiction was unconstitutional to the extent it conferred jurisdiction on the Federal Court with respect to matters under state law (i.e. the Corporations Law of each state) R v Hughes (2000) • HC cast doubt on the constitutionality of a scheme because it involved the states (under their respective Corporations Laws) conferring powers on Commonwealth officers Corporations Act 2001 (Cth) • State referral of power to the Commonwealth under s.51(xxxvii) Constitution • Act commenced operation on 15 July 2001 Regulators Australian Securities & Investments Commission • Commonwealth Agency (b/c referral of State power) • Responsible for ensuring the Corporations Act is complied with • Legislative authority: – ASIC Act 2001 (Cth) – Corporations Act 2001 (Cth) • Powers include: – Investigate breaches of the Corps Act – Instigate civil proceedings and criminal prosecutions (concurrent with DPP) – Advises ministers on necessary changes to the Corps Act – Educational role • More than 2 million Australian companies • 99% of these are companies limited by shares Australian Stock Exchange • Private Company • Public companies that ‘list’ on the stock exchange ‘contract’ with the ASX that they will comply with the Listing Rules Takeovers Panel • A peer review body with at least 5 members • Important part of the machinery for the control of company takeovers (formerly, these powers were held by the Courts) • Has power to declare ‘unacceptable circumstances’ Company Sources of Law & Regulation Statute: Corporations Act 2001 (Cth) Common law Constitution (& Replaceable Rules) ASIC, ASX & Takeovers Panel Separate legal entity status • On registration, a company becomes a separate legal person • (s.119) A company comes into existence as a body corporate at the beginning of the day on which it is registered • (s.124) Legal capacity of: – Natural person • Own property • Contract • Sue and be sued – Body corporate • Issue shares • Grant a charge Concepts  Separate legal status  Limited liability  Corporate veil  Perpetual succession Consequences of treating the company as a separate legal entity 1. Company’s obligations and liabilities are its own, and not those of its participants • Shareholders have limited liability • Liability of shareholders is limited to the amount they have not paid on their shares. • So if a shareholder has fully paid for the shares – he has no liability • If only paid $1 on a share that was issued by a company at the price of $3 – the shareholder’s liability would be limited to the amount unpaid on the share - $2 2. Company can sue and be sued in its own name 3. Company has perpetual succession 4. Company’s property is not the property of its participants 5. Company can contract with its participants Salomon v Salomon & Co Ltd (1897) Facts • Mr S was the sole trader of a shoe and leather business • Co Act 1862 (UK) required 7 shareholders • Salomon & Co Ltd incorporated • Mr S 99% shareholder and managing director • Mr S sold business to Co for cash and secured debt Board of Directors Company Shareholder A Shareholder B Shareholder C • Business failed, assets of Co insufficient to repay secured (Mr S) and unsecured creditors Arguments Liquidator argued that because the business operated by the Company was the same as that operated by Mr S, and because Mr S had effective control of the Company, the court should hold Mr S liable for the loss suffered by the Company Held • A company is a separate legal entity even though a single person manages and controls it • A company can contract with its controlling participants “The company is at law a different person altogether from the subscribers to the memorandum [shareholders]; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided in the Act.” (Lord Macnaghten at 51) Note! – In rejecting agency argument: “Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not.” (31) Lee v Lee’s Air Farming Ltd [1961] Facts • Company operated a crop dusting business • Mr Lee was the main shareholder and managing director of the company • Mr Lee was also an employee pilot • While working, Mr Lee was killed in a plane crash • Mrs Lee claimed she was entitled to workers compensation because Mr Lee was an employee • Insurer argued Mr Lee could not be an employee and employer Privy Council • A company is a separate entity from its controller – who may also be its sole employee • A company is a separate legal entity and a person may concurrently have a variety of legal relationships with that company Macaura v Northern Assurance Co Ltd [1925] Facts • Macaura assigned right to timber to a Company, received shares in consideration • Timber destroyed in fire • Macaura claimed insurance – policy was in his individual name, not in name of the Company House of Lords • Shareholders do not have a proprietary interest in a company’s property • Insurance legislation required policy holder to have an ‘insurable interest’ in the property • The company was the owner of the timber, not Macaura (meaning he did not have an ‘insurable interest’ and so could not claim on the insurance for the damaged timber) Note! – Company’s property is not the property of its participants. CEPU v Queensland Rail [2015] 69. …referring to a corporation as "an entity with status as an artificial person", Murphy J in Adamson's Case went on to state that "[t]he constitutional description of trading corporations includes those bodies incorporated for the purpose of trading; and also those corporations which trade"[102] Those two ways in which his Honour identified the constitutional description of trading corporation as capable of applying to a corporation – by reference to its trading purpose or alternatively by reference to its trading activity – must each be qualified to exclude that which is insubstantial. This is not a case which calls for any examination of that qualification or for any consideration of how purpose and activity might interact in a case where the substantiality of a trading purpose or of a trading activity might be marginal. 70. The basic point that the constitutional description of trading is capable of being applied to a corporation either by reference to its substantial trading purpose (irrespective of activity) or by reference to its substantial trading activity (irrespective of purpose) is sound in principle and is supported by authority. Note! - Thus, according to Qld Rail case a corporation refers to any entity with status as an artificial person incorporated for purpose of trading. Piercing the corporate veil Corporate veil • Legal rules that grant the company ‘separate legal personality’ and separate the company from its participants (e.g. shareholders, directors) are referred to as the veil of incorporation or corporate veil • Salomon’s case established that a company and its participants must be treated separately – i.e. the corporate veil protects the company’s participants from liability • This is the general rule in Australia Note! - Only in exceptional circumstances will a court pierce the corporate veil and disregard the separate legal personality of a company. Common law exceptions • Where company used to avoid existing legal duty • Where company used for perpetuating a fraud Statutory exceptions • Insolvent trading • Debts incurred as trustee Where company is used to avoid existing legal duty • Corporate veil may be pierced where company formed for sole or dominant purpose of avoiding an existing legal duty – OK to form a company to limit personal liability for future obligations, but not to avoid existing obligation • Gilford Motor Co Ltd v Horne – Company formed for sole or dominant purpose of avoiding a noncompete clause • Jones v Lipman – Company formed for the sole or dominant purpose of avoiding a contract for the sale and purchase of land Insolvent trading • Insolvency = company cannot pay its debts as they fall due for payment • Corporations Act lifts the corporate veil when a company trades while insolvent and imposes personal liability on directors for the company’s debts (s.588G) s.588G: • Directors become personally liable if the fail to prevent the company incurring a debt when there are reasonable grounds to suspect the company is insolvent or the debt will render the company insolvent • Defences – s.588H Lifting the corporate veil of group companies Adams v Cape Industries Pty Ltd - “…the court is not free to disregard the principle of Salomon v Salomon merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entitled with all the rights and liabilities that would normally attach to separate legal entities: Corporate liability for crimes and torts Company liability • A company is a legal fiction • So how does the law impute an ‘action’ or ‘state of mind’ to a company to hold the company liable for criminal or civil wrongs? • Vicarious liability • Direct liability Vicarious liability • Legislation may provide that company may be convicted for the actions of its agents without the need to impute a guilty intent to the company • Under common law, an employer (i.e. Company) is vicariously liable for the acts of its employees in the course of employment • Actor is personally liable and company is vicariously liable Direct liability: Organic theory • Company may be primarily liable when the act/intent of a person are taken under the ‘organic theory’ to be the act/intent of the company itself • Company liable for the act/intent of employees “who represent the directing mind and will of the company, and control what it does.” HL Bolton (Engineering) v TJ Graham and Sons Ltd [1956] • Whether person constitutes the mind and will of the company determined on case-by-case basis • Seniority is key factor Legislation that lifts the corporate veil of group companies Holding company’s liability for insolvent trading by subsidiary Consolidated financial statements Taxation consolidation The benefit of the group as a whole Pooling in liquidation • “Some of the people in the company are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by law as such.” per Lord Denning in HL Bolton (Engineering) v TJ Graham and Sons Ltd [1956] Tesco Supermarkets Ltd v Nattrass [1972] Facts • Radiant washing powder advertised at sale price • Sale items all sold, shop assistant restocked items, but at full price • Shop manager not aware of this • Offence under legislation to sell products at higher price than as advertised • Defense available if due to act or omission of another person • Tesco argued that the shop manager and shop assistant were ‘another person’ House of Lords • Court applied the ‘organic theory’ to the shop manager and shop assistant and held that neither represented the directing mind and will of the company • Accordingly, the acts of the shop manger and shop assistant were not the acts of the company Types of business structures Company ‘separate legal entity’ Sole trader Partnership Joint Venture Trust Types of business structures Trust - used a lot as a business structure - often a company is seen as a trustee - for asset protection - seen as being extremely shady (trusts have big tax implications - used to split income) - still not a separate legal entity Company (‘separate legal entity’) - ongoing regulatory requirements - costs money - official - must be in line with the Corporations Act (only form that has the benefit of limited liability) Sole Trader Joint Venture - typically seen when its a joint venture between two companies (relationship regulated by contract [can be two individuals - generally companies] its not a separate legal entity just a relationship) Partnership - partnerships are a little more complex because people can leave - no separate legal entity - also question of liability (risk associated is that everything is joint) Company Pro • Separate legal entity • Limited liability • Perpetual succession • Flexibility – Share classes – Liquidity • Finance Con • Corporations Act compliance • Establishment and ongoing costs • Shareholders less involved in management • Public disclosure requirements Sole proprietor/Trader Individual conducts his/her own business Pro • Simple • Minimal establishment costs • Minimal regulatory compliance issues • High level of control Con • No limited liability • Small size makes raising finance difficult • Limited lifespan Partnership Carrying on a business in common with a view to profit (s.5 Partnership Act) Pro – Minimal establishment costs: only need meet definition of partnership – Minimal regulatory compliance issues – Active in the conduct of the business Con – No separate legal entity: partners contract personally for the partnership – Risk: partners incur debts/obligations on behalf of other partners i.e. joint and several liability – Size limited to 20 partners (subject to exceptions) Joint Venture Contractual relationship similar to partnership but relationship is not a business in common Pro – Severally liability: i.e. obligations and liabilities can be individualised (unlike partnership) – Inexpensive to create and maintain Con – No limited liability – No perpetual succession Trust A relationship – not a legal entity (many types) Pro – Beneficiaries have an equitable interest in trust property; contra shareholders who have no legal/equitable interest in company property – Income splitting – but may be contrary to anti-tax avoidance Con – Maximum life span of 80 years (law against perpetuities) – Beneficiaries have limited powers (unlike shareholders) – No separate legal entity; trust cannot hold property, contract, sue or be sued – Trustee personally liable (may have right of indemnity from trust assets and beneficiaries) The process of registration (incorporation) How to create a company • Lodge application form 201 with ASIC & pay fee • s.117 CA sets out the prescribed contents of the application: – Whether company proprietary or public – Members, number of shares and share classes – Directors • Pty – one ordinarily residing in Australia; • Public – min of 3, 2 ordinarily residing in Australia – Secretary • Public – must have – Consents of members, directors and secretary – Address of registered office – Constitution or replaceable rules – Company name • ASIC registers company, allocates ACN, issues certificate of registration • Company comes into existence when registered (s.119) Separate legal entity – so what? • Company’s obligations and liabilities are its own, and not those of its participants • Company can sue and be sued in its own name • Company has perpetual succession • Company’s property is not the property of its participants • Company can contract with its participants • A person may concurrently have a variety of legal relationships with a company (e.g. director, shareholder and employee) Note! - Review on Salomon v Salomon • Also ordinary for law firms to have a shelf company on the side which changes its directors etc • If a company exists for longer than a period of time – ASIC has to power to deregister it (~18mths) • Can you change the attributes of a company? – yes you can, once its set up with founding members – doesn’t suggest that that’s what its always going to look like • Can also change the name of a company – all you have to do is pass special resolution off members – ACN stays the same generally – entity stays the same Topics 3/4 – Types of companies & Constitution and replaceable rules Company types What makes a company the perfect investment vehicle Pool resources Access to capital Shareholder capital (shares) Debt finance Mitigate Risk Limited Liability Corporate Veil Perpetual Succession Company lives after shareholders die Can transfer wealth Separation of management & ownership Shareholder rights are protected Still have a voice Make money Dividends Can sell shares Tax benefits Company classification Members Liability Limited by shares Limited by guarantee Unlimited company No liability Public Status Public Company Proprietary Company Small Large Company limited by shares • Most popular • Member’s liability to the company limited to amount unpaid on their shares (s.516) – So if shares are fully paid, there is no liability risk • Warning to creditors: – Limited or Ltd must be in company’s name (s.148(2)) • Can by public or proprietary Company limited by guarantee • Member’s liability limited to amount member undertaken to contribute if company wound up (s.517) • No share capital • Often used for non profit activities • Can only be a public company Unlimited company • A company whose members have no limit placed on their liability (s.9) – i.e. Members are jointly and severally liable for company’s debts without limitation upon winding up • Not suitable for trading ventures, primarily used by professional associations where members required to have unlimited liability • Can be public or proprietary No liability company • Must be a mining company (s.112(2)) • Mining Company = constitution must state that its sole objects are mining purposes (s.112(2)(b)) – If constitution permits activities that are not necessary for, or incidental to, its mining purposes, the company will not meet the definition of mining company: ASC v SIB Resources NL • Can only be a public company • Warning to creditors: ‘No Liability’ or ‘NL’ must be used in company’s name (s.148(4)) Public & Proprietary companies Public • Company other than a proprietary company (s.9) • All ASX listed companies are public • Can invite public to subscribe for shares • No restriction on maximum size of membership Proprietary • Must have no more than 50 non-employee shareholders (s.113(1)) • Must not engage in any activity that would require the lodging of a disclosure document (s.113(3)) (limited exceptions) • Must have ‘Proprietary Limited’ or ‘Pty Ltd’ at end of name (s.148(2)) Proprietary companies Small proprietary company s45A(2) • Less disclosure obligations – Don’t have to prepare P&L account or balance sheet – Subject to s.292(2) • Don’t require an auditor Large proprietary company s45A(3) • More extensive disclosure and reporting obligations • s.292(c): – “A financial report and a directors’ report must be prepared for each financial year by … all large proprietary companies” • Do require an auditor – Average cost of preparing an audited annual report is about $60,000 Converting a company’s status (Public to proprietary to public etc) • Requires a special resolution • Application through ASIC (s162/163) • If quorum is at meeting the resolution can be made Note! – Can always revert back to get rid of regulatory burdens Holding and subsidiary companies • A company may hold shares in another company • All companies viewed as separate legal entities (and related body corporates) • Company relationships: – Subsidiary – Holding company – Related body corporate Holding – subsidiary relationship – related body corporate Why list? Listing requirements Minimum shareholder requirements Company size Additional Corps Act requirements Remuneration report (s.300A) Half-year and annual financial reports Listing Rules Continuous disclosure Information that reasonable person expects would have effect on price or value of shares Corporate governance Greater shareholder protection ASX Listed Companies S 46 - A company is a subsidiary of a (holding) company if: – Holding Co controls composition of Subsidiary Co’s board; – Holding Co could cast or control more than 50% of votes at Subsidiary Co meeting; – Holding Co holds more than 50% of issued shares in Subsidiary Co; or – Subsidiary Co is a subsidiary of another subsidiary of Holding Co S 50 - Companies in a holding – subsidiary relationship are ‘related bodies corporate Note! – Just needs to be one of the components in s46. They must also be the related bodies corporate s50. Controlled entities • Corporations Act also uses the concept of ‘control’ to define corporate groups more broadly than the ‘related body corporate’ test • S.50AA: – A controls B if A has capacity to determine the outcome of decisions about B’s financial or operating policies – Consider the practical influence A has over B and patterns of behaviour (4) Constitution & Replaceable rules What is in a company’s internal governance rules? • Matters governed by internal governance rules typically include: – Appointment, removal and powers of company’s officers – Procedure for convening & conducting: • Director’s meetings • Member’s meetings – Special rights attached to share classes – Rules regarding dividends What is in a company’s internal governance rules? Identifying the internal governance rules Replaceable rules Constitution Adoption and alteration of a constitution Limits on the right to alter a constitution Non compliance with internal governance rules The constitution and RR as a statutory contract Limits on the enforcement of the statutory contract Single director & shareholder companies – Rules regarding the transfer and transmission of shares Identifying the internal governance rules • (s.134) Rules that govern the internal regulation of a company consist of: – Replaceable Rules set out in Corporations Act; • Set of model rules a company may adopt – Constitution; or – Combination of Replaceable Rules and constitution Before 1 July 1998 Memorandum of association • Historically, the document by which the original incorporators signalled their intent to form a company • Included: – Company name – Share capital details – Liability of members limited – Initial subscriber details – Objects clauses (older companies only) Articles of association • By-laws regarding internal governance • Model articles referred to as Table A articles of association were included as part of the (then) Corporations Law • Companies could choose to: – Adopt Table A – Adopt different articles; or – Combination After 1 July 1998 • Requirement to have Memorandum & Articles of Association abolished to simplify and modernise company law • Set of model internal governance rules called ‘Replaceable Rules’ included in Corporations Act • Companies can use Replaceable Rules – or replace with something more suitable When do replaceable rules apply? Note, RR do not apply to single director / single Replaceable rules What do replaceable rules contain? • RR are spread throughout the Corporations Act • Section 141 sets out a table of provisions that are RR When are replaceable rules appropriate to use? • Depends on individual circumstances of the company and participants • Most suitable for unlisted public company with two or more members • Principle of majority rule • Not suitable: – Two equal shareholders – Shareholders with particular rights – Don’t include call and forfeiture provisions so not suitable if issuing partly paid shares Constitution Adoption • Rather than rely on RR as internal governance rules, company may adopt different rules in the form of a ‘constitution’ • RR can be displaced or modified by company’s constitution: s.135(2) Why adopt a constitution? • Substitute different rules for some/all RR that are unsuitable (e.g. where majority rule is not appropriate) • Supplement RR (e.g. to permit different classes of shares or partly paid shares) • Collate all internal governance rules into one place • Ensure any legislative amendment to RR doesn’t take effect unless specifically adopted by the company Companies formed before 1 July 1998 Can invoke RR by repealing existing Mem & Arts (s.135) Otherwise, Mem & Arts continue to apply Companies formed after 1 July 1998 RR apply automatically, unless displaced or modified in accordance with s.135(2) • To satisfy ASX listing rules Adoption & alteration of the constitution Adoption • Constitution may be adopted: – On registration with written consent of every proposed member s.136(1) – After registration by special resolution: s.136(2) • Special Resolution = resolution passed by at least 75% of votes cast by members entitled to vote on the resolution (s.9) Alteration • A company may amend or repeal its constitution by special resolution of members: s.136(2)