Week1 COMPANIES Separate Legal Entity -> s125 (Salomon V Salomon pg46) (Lee V Lee s Air Farming Ltd pg47) (Macaura V Northern Assurance Co Ltd pg47)

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1 Week1 COMPANIES Separate Legal Entity -> COY is separate from members&participants -> s125 Obligations and property are its own, not its participants Constitution limits these powers. (Salomon V Salomon pg46) - Going concern if participants change. (but COY remains unchanged) - 1) Incur obligations, hold rights, sue and be sued in own name. - 2) Contract with controllers. Contract requires at least 2 separate parties -> COY can contract with it s controlling participants (Lee V Lee s Air Farming Ltd pg47) - 3) Perpetual succession, separate tax payers, participants may have limited liability but COY has unlimited liability. -> COY proper is not property of participants (Macaura V Northern Assurance Co Ltd pg47) Shares -> s1070a(1)(a) is a personal property of a member -> s1070a(1)(a) is transferrable if allowed (eg: by constitution) -> (Sydney future Exchange Ltd V Australia Stock Exchange Ltd) - Right to a claim against coy. With particular rights attached. - Control rights- voting rights and rights to receive info. - Distribution rights- interim & final dividends and share in assets upon winding up. - Shareholders don t own company s assets. Amt paid/given for share is company s property. - Power to issue shares is up to directors (s198(2) and 124(1) and 254A(1)). - Shareholder approval might be required if issue new class issued. Amend constitution (136(2)) or variation of existing class rights (246C(6)). Classes of Shares -> S254B(1) allows COY to determine the terms/rights/restrictions of shares issued - Why issue different classes of shares? -> dividend entitlements, voting rights, dividend priority, winding up priority. Ordinary Shares v Preference Shares & Partly paid shares O - Right to share equally in dividends, after all other claimants are paid - Right to vote at GM - Right to be repaid capital on a winding up, after all other claimants are paid - Right to share pro rata in any surplus assets on a winding up P - Right to receive fixed dividend set by COY - Right to be repaid principal on a winding up, priority to ordinary SH - Right to vote at GM, only if rights are affected (ASX Listing Rule6.3, restrict P voting rights) - No Right to share pro rata in any surplus assets on a winding up PPS (pg ) - S254M(1) if shares are partly paid, SH is liable to pay calls on shares in accordance with shares issued If PPS not paid - S254M COY constitution could state Sue SH/shares forfeited/sell share, keep amount of call and pay balance of proceeds of sale to defaulting SH Voting rights on different Classes of Shares -> Listed COY ASX Listing require 1 vote 1 share for all ordinary shares -> S250E(1)(a) COY with Share capital on show of hands, 1 vote per member -> S250E(1)(b) COY with Share capital on poll, 1 vote per share held by member -> S250E(2) COY without Share capital 1 vote per member regardless poll/hand -> S250E(3) Chair has casting vote (in addition to voting as a member) 1

2 Management Structure - Officers- persons responsible for coy mgmt. Member can be officer in small coy. Not big coyseparate roles of officers and members in corporate decision make. Must be natural person. - Directors (board)- are included as officers. Pty=1 Ltd=3 min. Make most decisions affecting company without member approval. Coy mgmt. Exec (coy employed. Devote work time to coy affairs) and non- exec (not employed by coy. Outsider contrib and oversight to directors). Not automatically a member. - Member (shareholders, not officers) Invested by subscribing for new shares in coy or acquiring from another person. Owner/proprietors. Any legal person/entity. Voting rights on some issues, but usually not mgmt decisions. Private investors or institutes could control the board. Person ceases to be a member by transferring shares or cancelling them. - Shareholder right to vote, distribution rights, info rights, class rights (refer to Shares ). Limited Liability -> s516 - COY ltd by shares, member s liability to contribute to meet COY debts is limited to amount remaining unpaid on their shares. If fully paid, no further contribution required. - COY pays its debts, not SH. - Transfer risk of corporate failure from investors to creditors. Benefits of Limited Liability - Encourage risk taking and entrepreneurial behaviour as investors quarantine wealth from risky undertakings. - Reduce need for SH to monitor investment/managers, allowing efficient SH portfolio diversification and reducing agency costs. - Free transferability of shares. Costs of Limited Liability - Creditors may want to enter separate agreement with a member or other, making person responsible for COY s debts. Separate contract. Or may ask for member guarantee to pay debts. Because no recourse to SH assets upon winding up. - Victims of negligence (i.e. tort victims sueing company). Company Law Sources - Corp Act Case/Common law (precedents) pg Other Corp regulations(asic act, AASB, ASX Listing rules) Purpose (pg20-23) - Provides for formation and termination of COY. - Characteristics of COY (SLE) - Rules governing duties of, and relationships btw COY participants, like directors & SH s or members & officers. (internal governance rules) - Facilitates dealings btw companies and outsiders (customer) - Investor protection (business financing rules), commercial stability and consumer confidence, balancing competing interests, certainty (standard form rules). Enforced by (If rules of COY are breached) - Public law sanction imposed by state (fine/term of imprisonment/compensation/banned from COY management) -> Contravention of provisions in CA could be a criminal offense/civil penalty provision - Private law remedy (paying for damages) 2

3 SETTING UP COMPANIES Not for Profit Organisations- not really business organisations. - Unincorporated associations - Clubs&societies formed to carry out activities with NO aim to make profit and distribute to themselves (otherwise = partnership as partners take profits). -> Profits may be incidental from activities, but must use for association and not dstrib to members. - Not separate legal entity. -> Cannot hold property/enter contracts/ sue/be sued in its own name (but by individuals) -> Members don t have limited liability. General rule: elected committee members, not members(individuals), are required to defend legal proceedings brought against it. - Incorporated associations- Incorporate under the Associations Incorp Act of state/territory. -> Ltd liability for members. Hold property enter contracts/ sue/be sued in its own name -> If formed for trading or business purposes, or to make profits to distrib to members, cannot incorporate under Assoc Incorp Act. (student union) Forms of Business - Unincorporated entities - Sole Trader/Proprietorship -> Individual carries bus in his own name. -> No separation btw business & personal assets -> Personally liable for its debts & Individual is tax payer -> P&L can be offset against his other income. - General partnership group of profit makers through law/partnership agreement -> No SLE -> Unlimited liability unless partners of a Ltd partnership. -> Agents of each other and equal profit rights (unless agreed otherwise). -> Hard to transfer ownership or exit.(cause need unanimous consent of partners) -> Partners are individually tax. -> S115 more than 20 partners not permitted without minister consent. (eg law/acct firms) - Limited partnership permitted under state/territory statute. (rarely used) -> Allow investors to contribute, but have no say in management. -> Taxed like COY, but without perks. (therefore, preferable to be COY than this) - Benefit of limited liability At least one general partner (can be a corporation) with no limited liability managing business and one limited liability partner who contributes capital. If partner with limited liability participates in management, his limited liability is lost. (JV s, trusts and managed investment schemes, syndicates pg 72) - Incorporated entities Corporations consider: profit, liability, size, raise capital, formalities and expense, audit reporting requirements, tax Advantages - Limited Liab (SLE) -> debts, obligations to creditors, supplier, employees are its own, member liability is limited to pre- agreed amount (i.e. bal of unpaid shares). -> Companies can create subsidiaries (i.e. if venture fail, parent COY only lose amount invested in subsidiary) - Perpetual succession -> Indefinite existence till winding up&deregistration. Regardless of changes in participants. -> No need to transfer assets and obligations (costly&complex in transferring). 3

4 - Transferability of investors interests -> COY interests in shares traded on stock mkts. No other claims against them. Credit worthiness of other investors is irrelevant. Reduce transaction costs, facilitates ASX operation. Liquidity= easier to raise finance from public investor. PS interest cannot be assigned. - Company law as standard form contract govern aspects of relationship btw COY and investors, managers, creditors. -> Reduce legal advice costs and uncertainty. (i.e managers right to participate in management and share in profits.) - Flexibility through COY constitution -> COY may issue share of differing rights and classes. Meaning differing interests of different classes of investors are easily accommodated through constitution. -> Restriction on officer power can be part of framework of company law through constitution. - Tax -> COY pay less tax than individuals. (30% abouts, highbracket 48% for individuals) Disadvantages - Publicity -> COY must disclose participant info to AIC and generally public and shareholders. -> Must disclose key financial info to ASIC periodically (not small pty ltd). -> COY are disclosing entities under CA2001 (COY with public shareholders). -> Can t keep info private = lose competitive edge. - Expensive formation and compliance -> ongoing admin obligations (less for small pty) like public filings, maintaining records, disclosing info to members (audit, acctng, legal, mgmt time diverted to oversee legal and reg. compliance). -> COY and participants have special powers/privileges (incorporation). Regulated by CA obligations, most are public law obligations. Enforced by state through criminal sanctions or civil penalties. Public Companies - Limited by shares (usually a public COY) -> S9 - member liability limited to amount (if any) of unpaid shares they hold. Issues fully/partly paid shares for their money/property contributed. -> S254W dividend rights payable to SH = same, unless constitution/sr changes it - Unlimited COY -> no limited liability (law firms) - COY limited by guarantee No share capital, no dividend. (Nonprofit, independent schools) -> member liability limited for amounts they guaranteed to contribute to COY (if coy wound up) - No liability COY(NL) (mining COY) -> S112(2) No statutory or contractual right to recover unpaid amount on shares from members. NL in their name. -> S254W dividend payable to SH regardless of circumstance (no dividend entitlement if call made on share& if call is due and unpaid) - All ASX COY = public = listed & If not PTY in name = public - s201a Require Public COY to have at least 3 directors whilst PTY COY need only 1 - s250n Require Public COY to hold AGMs - s292 Require Public COY to lodge financial reports regardless of size of COY - Ch 2E Restrictions on related parties - S204A Require Public COY to have a secretary - S201E Appointment of Public COY directors - S203D&S203E Removal of Public COY directors 4

5 - S329 Resignation of auditor of Public COY require ASIC approval - S300(10) Requires Directors Report to contain: qualification of directors, attendance at meetings, directors shareholdings/contracts with Public COY Proprietary Companies - Can be single director/sh COY (1 person can be both director and SH) - S113(1) No more than 50 members. (Non employee SH) - S113(3) No fundraising activity requiring a issue of disclosure docs/prospectus or Offering to issue shares to public generally. (no raising funds from public) - S148(2) PTY Ltd in its name = Proprietary COY - S45A can register as a Proprietary COY/be converted to Proprietary COY - S45A Small and large test. Large has more disclosure and reporting obligations. Pg84 - S254W dividend rights depends on COY RR -> if COY change type PTY to Public: procedure set out in Pt2B.7 of CA COY must pass a SR to change its type and then comply with the various registration requirements&new requirements -> s166 the change does not crease a new legal entity/affect existing relationship with outsiders Corporate Groups- Law treats them as Separate legal entity - Control of one or more COY is in hands of another BOY. Diff aspects of a business are owned and carried out by different COY in a group. - Holding COY&subsidiary/ subsidiary&subsidiary of Holding COY = related body corporate - Wholly owned subsidiaries = all issued share are by Holding COY - Benefits -> limited liability to quarantine risk of part of business from others assets. -> benefit of separating management of different aspects of business. - Div 6 Pt 1.2 of CA COY is a subsidiary of another COY(holding COY) if: -> s46&s47 - subsidiary is a subsidiary of another subsidiary of holding COY -> holding COY holds more than one-half of issued capital (excluding non-voting shares) of subsidiary -> holding COY is in a position to cast/control the casting of more than one-half of votes at GM of subsidiary -> holding COY controls the composition of subsidiary s board (can appoint/remove COY directors) 4steptest - Controlled entities -> s50aa(1) - control if first entity can determine outcome of decisions about second entity s financial or operating policies. (concept wider than that of subsidiaries) Law recognises and regulates corporate groups pg88-89 (insolvent trading/related party transactions/fs/large&small proprietaries/director s duties) Listing and registering of COY&COY name change pg (s117 details procedure) NB: Insolvency= A < L. Unable to pay debts as they fall due. Internal Governance Rules - Change in IGR generally requires SR by directors/sh - Effect of contractual obligations on COY, its members and officers - Consist of Replaceable rules in CA or Constitution or Combo of both (s134) - Deals with arrangement (by laws) agreed btw members to govern COY internal workings. (I.e. appointment, powers and removal of officers/directors, share transfer,dividends etc. 5

6 Replaceable Rules (Introduced in 1998) s141, lists RR pg s135. Coy formed on/after 1/07/98 can have its internal management governed by RR by simply not adopting a constitution. - s135(1). If formed before 1/07/98, can have its internal management governed by RR by repealing existing memorandum and articles of association. - s135(2). RR apply unless displaced or modified by constitution - Breach of RRs is not breach of act 135(3). No Criminal/Civil liability/ Injunction. (similar to written Constitution of COY) - S135(1) RR do not apply to single director/sh COY - S134. COY have no IGR unless they have adopted a constitution! (therefore, since don t have IGR as didn t adopt constitution, COY rely on RR) Note - s249x (mandatory for public COY, RR for Pty COY)and 203C (RR for Pty COY only) - Suitable for mostly unlisted COY with >2 members. RRs can be supplemented with constitution setting out rights. Sometimes, RRs not sufficient (partly paid shares). - Some COY (Inc. ASX listed COY) cannot have RRs as IGR Constitution - Alternative to relying on RRs, COY can adopt constitution - s135(2) RR can be displaced/modified by COY constitution - Substitute (customize) internal gov rules for all/some RRs. s Supplement RRs to address matters not covered by them (partly paid shares). - COY formed prior to 01/07/98 with their old memorandum and articles of association can use such as their constitution. Can amend and repeal constitution by s136 & s137 - Constitution can be adopted before COY is registered. s136(1)(a) - Constitution can be adopted when COY is registered or later. s136(1)(b) via SR - Adopting, amending and repealing of constitution requires special resolution of members s136(2). - Listed COY must have constitution consistent with ASX Listing rules. - Public COY that amend/repeal constitution must give notice to ASIC s1356(5) - If constitution specifies additional requirements, amendment to constitution by SR would NOT take effect unless additional requirement was satisfied s136(3) -> Provision cannot be altered unless the additional requirement was met s136(4) Legal effect of internal governance rules - S140- COY constitution(if any) and any RR that apply to coy have CONTRACTUAL effect btw COY -Member, COY -each director and secretary, member- other member. - Statutory contract is deemed contract only as btw parties referred to in s140 -> Eley v Life Assurance Co Ltd (only member/director/secretary no other role) - 4 legal limitations on pg memberofficer contract, employee capacity, excuse failure, members right to enforce. - Breach of IGR (non-compliance by COY/member/director) = breach of contract by operation of s140. -> statutory injunctions DON T apply s135(3), therefore s1324-injunction DON T apply, instead should seek injunction/obtain damages under ordinary jurisdiction of Supreme Court -> Oppression s232e to s234. -> Breach to act in good faith and with proper purpose s180(2). - Breach of IGR = procedural irregularity (quorum requirement) s1322 applies NB: Quorum= min no of people in meeting to validate it (Quorate). Single director/shareholder company- governed by 198E, 201F, 202C (director power, appointment and remuneration) pg111 - Only member (shareholder) is only director. - Only allowed for pty coys. (public coy must have at least 3 directors) - RRs and internal government rules DON T apply 135(1), unless adopted a constitution. - RRs apply if additional director joins and not immediately displaced by constitution. 6