LAW2001 Corporate Law

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LAW2001 Corporate Law

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LAW2001 Corporate Law

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Course Code: LAW2001
University: Torrens University

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Country: Australia

Discuss about the Corporate Law forText and Essential Cases.

Case Study 1
As per the given case the directors of Uninest Ltd relied on the opinion of Neales, the board of directors of the company passed a resolution so as to grant interest free loan to one of the directors, Gilligan.
Pursuant to the above, Gilligan was issued the requisite shares. It is seen in the case study that Neales is a consultant who is working for Uninest and she has taken many decision on behalf of the company (Hahn, Peter and Meziane Lasfer 2015). Therefore, the directors of the company relied on the decisions of the Neales and passed a resolution granting to lend Gilligan a sum of $30 million which is interest free. It is seen that this strategy is formulated so that there is significant rise in the price of the shares and thus it will make Urbanlodge Ltd difficult to take over the management of the company (Hung and Humphry 2015). 
The Corporations Act ,2001, which lays down the duties of the directors of the companies which is subject to a business judgment rule and in pursuant to which the director is required to make decision in good faith and for a valid purpose. There should not is any personal interest in relation to the judgment (Lanis, Roman and Grant Richardson 2012). The directors shall convey to the rest every aspect to the decision so that they are able to believe on appropriateness. They shall believe that the decisions are taken care of in the best interest of the business.
As per Section 180, of the Act all the directors and other officers shall exercise their powers to disclose the powers so that they are able to discharge their duties with care and diligence. Section 181 of the Act provides that the directors shall on good faith undertake the interests of the company and for a valid purpose (Richardson et al., 2013).
The Court has applied the business rule in supplied a statutory support. In the case of Australian Securities and Investment Commission v. Mariner Corporation Ltd. (2015) it is seen that in order to ascertain the breach of duty it is essential to assess that the application of the business judgement rule is illustrated as per Section 180 (1) of the Act (Sealy, Len and Sarah Worthington 2013).
The following is taken into consideration for determining the liability:

The surrounding circumstances and the terms of constitution and the nature of business and composition of the board.
The role of the directors and the responsibilities that are distributed with other officers, reporting systems and other requirements of company.
The applicable legal Constitution

In the above scenario the company in order to avoid the takeover and to lend a large amount of amount to one of the directors so as to enable him to make a purchase the share of the company at a higher rate. It can be seen that the comapny took thsi decision on the advice of teh consultant Neales.This shows that the director has failed to exercise   diligence or care in doing the correction action. Thus, the resolution was passed for granting interest free loan to one of the directors of the company was completely based on the decision of Neales. All the directors relied upon the decision of Neales and have failed to take the decision by application of their own skills and experience (Van den Berghe and Lutgart 2012).
In the case, the court in ASIC v. Rich (2009) says that both the directors and officers of the company are under an obligation to inform them on what decision they have taken. In light of the above case law and the judicial pronouncement it can be stated that the directors failed to comply with the business judgement rule as they did not inform themselves about the subject matter and relied only on the opinion of Neales.
Thus it was the breach the duty of care and diligence. Further, these laws are equally applicable on to the officers and hence, Neales is also s liable as he also failed to assess all the aspects of the decision (Austin and Ramsay 2012).
Case Study 2
In the case study, Primo is one of the construction companies, who has been working with Land stock. Shane was the director as well as shareholder of Primo is appraised with the fact that Land stock is soon going to call for tenders in respect to building a warehouse around a major port. Shane in between formulates a new company in the name of Iconstruct Limited .Shane did not inform the directors of Primo about the new company and submits a tender to Land stock for construction of the said warehouse. Shane was aware about the tender quotation which was submitted on behalf of Primo and this was submitted at a lower price in the submission by Iconstruct Ltd (Cassidy ,Corporations Law Text and Essential Cases 2013).
As per section 183(1) of the Act specifically prohibits a director or other officers from improperly using a confidential information for personal interest or against the interest of the corporate. In the case of ASIC v. Stephen William Vizard (2005) the court refrains the director from using an information which was obtained during the course of his position of director in the company for an improper use (Ciro and Symes 2013). This section is equally applicable on directors who are currently holding the position in the corporate or who have held such a position in the past. While dealing with a case under this section, court also takes into consideration the character of the director or officer being assessed. In the case of Australian Competition and Consumer Commission v. ABB Transmission and Distribution Ltd (2002) a contrary view was taken by the court, stating that nature of offence shall be the primary consideration, rather than the character of the person.
Apart from this specific duty under Section 183, a director is also imposed with Fiduciary duties which are directly owed to the company (Davenport and Parker 2012). The duty of director is base on the trust and faith and in pursuance to this duty, directors shall not indulge in situations where they are not able to act in best interest of the company or there arises a situation of conflict of interest. In the case of Fodare Pty Ltd. v. Shearn (2011) it was opined by the court that under the fiduciary duty, a director is under an obligation to always act for a proper purpose with reasonable care and diligence and shall not in any instance improperly use the position.
 The act considers it as an offence which shall be specifically established on the basis of following elements:

Possession of confidential information which may have material impact on the operations or profitability of corporate.
Such an information is not generally available
The concerned person is involved in trading, where the said confidential information is highly relevant.

In pursuance to the same, it can be stated that the Shane had acted in breach of the duty enumerated in Section 183(1) of the Act as well as is liable for the offence of Insider Trading. In the present case, Shane was occupying the position of Director in Primo Ltd., and because of this information was aware of the price quotation which the company was going to bid before Landstock.
These facts clearly establish that Shane has conducted the offence of Insider Trading. Moreover, he has also acted to breach the general duties of acting in good faith and with loyalty. In addition, he has also breached the duty to not make improper use of information or position which one has owing to his/her position in the company (Fisher , Anderson and Dickfos 2017).
Part B
Section 1043B – J of the Act provide for certain statutory exceptions which includes insurance underwriters or disclosing the information in pursuance to a legal obligation. Further, Section 1044A of the Act also states that communication of an information in the normal course, with no intention of contravention shall also account for a valid defence to the offence of insider trading.
The Act provides for penalty for committing this offence which could be upto $450,000 fine and/ or 10 years of imprisonment. Thus, the liability imposed for committing this offence is criminal in nature (Harris, Hargovan and Adams 2013). Recently, in the year 2016 the court dealt with the case of a Sydney stockbroker in the name of Oliver Curtis who imprisoned for insider trading. It was ascertained that he had made illegal profits to the tune of $1.4million. In this case, it was also stated that the nature of offence reduces the consideration which is laid on the good character of the offender. Thus, in the present case though this is one of the first instances Shane has undertaken such a criminal action; the liability shall not be reduced (Fitzpatrick et al. 2014).
On the other hand, the breach of general duties imposed by the Act shall impose civil obligations, the court may require payment of pecuniary penalty which could be upto $200,000 to the Commonwealth and compensation to the concerned company for an amount of which loss has been sustained by the business (Hanrahan, Ramsay and Stapledon, 2013).
Case Study 3
The given factual scenario involves Dronebotics Ltd. which is a start up and is indulged in manufacturing as well as supplying of autonomous drone systems. These drone systems operate with the usage of automatic flying robots and are programmed to accomplish the tasks of monitoring, inspecting, surveying and then returning to base station. Another company in the name of CorpGain Ltd. approaches Dronebotics Ltd for procuring the autonomous drone systems. CorpGain is into agribusiness and intends to use this system for inspection of towering grain silos. It has been ascertained that this is a very dangerous task for being performed by the employees and also imposes an obligation to comply with strict safety regulations (Hoad, Richard and Ian Ramsay 2013).
Frank and Diane, the two executive directors of the company are keen on taking up the project, in order to make expansion in different industries. It has been noted that the two mentioned directors have the tendency to take risks while undertaking business operations and hence are of the opinion to enter into the agreement. On the other hand, Ron and Kelly are the other two non-executive directors, who are of the opinion that entering into this agreement is not feasible for their current level of business. It is being argued by them that their present technological capability is not enough to effectively undertake the complex task as required by CorpGain Ltd, and shall also require considerable cost as well as research for developing suitable software. It is important to note that Ron and Kelly are experts who submit report to the board in respect to feasibility of the projects with the current level of operations (Li and Riley, 2012).
Scenario A
Director’s of a corporate owe obligation both under general law as well as relevant statute and this classification further enables the court to determine appropriate remedies which are available. In equity, the director’s are under an obligation of fiduciary relationship which sets a high standard of loyalty. These duties have been further incorporated into the Act in the form of General Duties of Director. Section 181, 182 and 183 of the Act imposes a general duty on the directors. In the recent case of Jaques v. AIG Australia Ltd. (2014) it was opined by the court that both executive and non-executive directors are under an obligation to abide the legal requirements of the position of directors, however, have certain distinctions in the manner they are expected to play their respective roles (Lipton, Herzberg and Welsh 2014).
Thus, in pursuance to Section 180 (1) the directors are required to comply with the business judgment rule, in pursuance to which statutory duty of care and diligence shall be completely complied with by the parties. In pursuance to the same, directors are under an obligation to be informed about the subject matter to the decision to the extent it leads to development of a reasonable belief that the decision is appropriate.
However, in the present case, Frank and Diane, in spite of being the executive directors failed to exercise this duty. This could be established from the fact that both of them refused to attend the meeting wherein the experts had opined that entering into a contract with CorpGain shall not be a feasible decision. Moreover, they also did not read the report which clearly elaborated upon the opinion of experts. Thus, this clearly establishes that Frank and Diane did not completely inform themselves about the decision to enter into a contract with CorpGain.
In the case of ASIC v. Healey & Ors. (2011) it was opined by the court that every director shall be considered accountable for decisions undertaken by the board. The courts of the nation have adopted a consistent approach towards duties of the director and have opined that each of them shall strictly make every effort to maintain high standards in performing their duties. It is important to note that Ron and Kelly made every effort to assess the decision of entering into a contract with CorpGain and in pursuance to the same attended the concerned meeting to be informed about decision of the experts. However, they lacked in consistently exercising care and diligence while undertaking their decisions. The fact that their decision was influenced by the dominant opinion of Frank and Diane, leads us to conclude that they were not able to effectively fulfill the requirements of their duty.
Scenario B
In the event the experts are of the opinion that the project is feasible to be undertaken considering the current level of technology, it would be rightful of the parties to given their assent to the decision. However, if in such an event also Frank and Diane fail to inform themselves about the aspects of judgment, they shall be considered to have failed to exercise their respective duty (Redmond, 2013).
Further, as mentioned in the facts of the case the drone system is supplied to CorpGain. While using the same they face a technical difficulty, which makes it impossible to be used. It is then found that the technological abilities of the company is not competent fulfill the required task. It can be stated that in the opinion of court every director is accountable for the decision being undertaken by the entire board, as it is based on the consent of individual directors. However, some of the defenses which could be raised by the director are Honest and Reasonable director Defense. In pursuance to this defense, it could be argued by Ron and Kelly that they had taken the decision relying upon the advice of experts and had acted in a reasonable manner. Further, in pursuance to the decision of ASIC v. Rich (2003) it can be stated that the directors also have the right to raise a defense on the basis of Business Judgment Rule as enumerated in Section 180(2) of the Act. It has been referred to as the safe harbor which intends to protect the directors which have taken use of opportunities which were subject to some form of risk (Parker, et al.2012). Thus, Ron and Kelly shall be entitled to raise a defense in the given circumstance, as also opined in the case of ASIC v. Adler (2002).
Austin R.P. and Ramsay,(2012) I., Ford’s Principles of Corporations Law, 15th Ed. Butterworths, Australia. p 201
Cassidy J., Corporations Law Text and Essential Cases (2013). Federation Press, 4th edition Sydney
Ciro T and Symes C,(2013) Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition
Davenport, S and Parker D,(2012) Business and Law in Australia, Thomson Reuters. p 15           
Fisher S, Anderson C, and Dickfos,. (2017)Corporations Law – Butterworths Tutorial Series, 3rd Ed. Sydney, Butterworths.. p 2015 
Fitzpatrick, Synes, Veljanovski, and Parker,(2014) Business and Corporations Law; 2nd Ed. LexisNexis. p 387
Hahn, Peter D., and Meziane Lasfer (2015). ‘The compensation of non-executive directors: rationale, form, and findings.’15.4 Journal of Management & Governance 589-601.
Hanrahan, P., Ramsay I., and Stapledon, G (2013). Commercial Applications of Company Law. 14th Ed CCH.. p 49
Harris, J. Hargovan, A.  Adams, M (2013). Australian Corporate Law 4th Ed. LexisNexis Butterworths. p 105
Hoad, Richard, and Ian Ramsay.  (2013)”Disclosures!: Corporate governance in practice.” 10.
Hung and Humphry.(2015) ‘Directors’ roles in corporate social responsibility: A stakeholder perspective.’  103.3 Journal of Business Ethics 385-402.
Lanis, Roman, and Grant Richardson (2012). ‘The effect of board of director composition on corporate tax aggressiveness.’ 30.1 Journal of Accounting and Public Policy 50-70.
Li, G, Riley, S. (2012) Applied Corporate Law: A Bilingual Approach  1st Edition LexisNexis. p 112
Lipton, P., Herzberg, A., and Welsh, M, (2014)Understanding Company Law, 17th Ed. Thomson Reuters . 210
Parker, Clarke, Veljanovski, Posthouwer, (2012) Corporate Law, Palgrave 1st edition
Redmond, P., (2013) Companies and Securities Law – Commentary and Materials, Law Book Co., Sydney, 5th,
Richardson, Grant, Grantley Taylor, and Roman Lanis (2013). ‘The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis.’32.3 Journal of Accounting and Public Policy 68-88.
Sealy, Len, and Sarah Worthington.(2013) Sealy & Worthington’s Cases and Materials in Company Law. (Oxford University Press).
Van den Berghe and Lutgart (2012). International standardisation of good corporate governance: best practices for the board of directors. (Springer Science & Business Media).

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