INVESTMENT LAW Essay Example

  • Category:
    Law
  • Document type:
    Assignment
  • Level:
    Undergraduate
  • Page:
    3
  • Words:
    1917

Investment Law

Section I: Facts of the situation

Mary’s case

Mary, Jason and Peter are shareholders and directors of Newtown property development Pty limited (thereafter referred to as Newtown). The company is into property development but it is also operates a hotel. Mary and Jason are brother and sister. Jason and peter are also partners in a separate business that involves book keeping. Mary is a sole parent with three children and does not work at Newtown but she is a non executive member of the board of directors of the company. Peter and Jason on the other hand are members of the executive board of directors. The total number of issued shares in Newtown is 9000 ordinary shares. Each director has 3000 shares and the shares are all fully paid.

Newtown is a successful company but has not paid a dividend in three years. Profits have instead been invested in further development projects. Mary has not worked for a while and is very short of money and with three children she is finding it hard to make ends meet. She approaches Jason and Peter and asks them whether they could consider having Newtown pay dividends again to its members. Unfortunately they refuse to consider Mary’s request as it would upset the long term aims of our company.

Mary is upset by this response and decides that she wants to sell her shares. Jason and Peter initially refuse to buy them but later relent and offer Mary $1 per share which is well below their value. Mary rejects this offer and both Jason and Peter demand that Mary resign as a director from Newtown. She reluctantly resigns but asks that she have access to Newtown’s books of account for the current financial year.1

INVESTMENT LAW University of Canberra, (5th ed, 1995)69

Jason and Peter refuse to provide this information. Mary finds out accidently that Newtown has been paying large consultancy’ fees to Jason and Peter’s bookkeeping partnership.

Key legal issues

There are several legal issues that emerge out clearly from this situation and needs to be addressed. The first problem in this case is dealings between John and Jason when it comes to the handling of affairs of Newtown, a company that they well understand of existence of another shareholder whom they neglected.2 In addition the conspiracy between the two to ensure that consultancy services are provided by a company that they jointly manage is a criminal offence under the company law. 3 It is also an issue of concern when one of the shareholders in the company wants to pull out of it through sell of his shares and the option is turned down or is offered a value that is below that of the share.

The main focus of the legal answer To determine whether Mary should bring a derivative action or personal action against Jason and Peter. In addition the answer seeks to indicate factors that should be taken into account in making this decision in making any of the decision and factors that influence this recommendation are also highlighted.
4 If she brings a personal action, should she bring it under the general law or make an oppression action under s232. If the decision is successful the kind of remedies that Mary should seek are also highlighted.

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2Baxt R, (7th ed, 1993)35

3Pont D, (2010)77

4Halloran K, (2007)100

Section II: Discussion of the law

It is important to understand that the law that governs companies recognizes the freedom of individuals to freely join and become shareholders in any given company. Once one becomes a shareholder in the company, he or she has the right to access any material that might relate to the shares including books of accounts. Shares are normally divided into two distinct categories namely ordinary shares and preference shares.

Ordinary shares

They are the most common type of shares and carry various rights that are accorded to the holder. These rights include the right to vote and the right to dividends once declared and at rates that are determined by the board of directors. Holders of these shares also have a right to share pro rata in any surplus assets on winding up.

Preference shares

Holders of these shares have more privileges as compared to ordinary shareholders. They also receive dividends at a fixed rate which is normally 10% per annum so long as there is profit and dividends have been declared. They also receive the right to be repaid the principal in priority to ordinary shareholders on winding up but have no or few voting rights and no right to share in surplus assets on winding up.5

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5Kern Corporatiointerstsn Ltd v. Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at p. 191

Payment of dividends

A dividend is a distribution to members or shareholders in a company after profit has been realized. The rule that governs how payment of dividends should be done states that dividends are payable only out of profit and not capital and the power to declare a dividend is only vested in the board of directors. In general cases, no single shareholder in the company can force payment of dividends since this is a decision that can be reached upon by the board of directors. Provisions of exceptions are provided under the s232 and involve oppressive or unfair conduct.

Remedies for improper dividend payment

The following are some aspects of company law.

  1. When dividends are paid out of capital and not profit thus reducing the capital of the company which is unauthorized under the rule in Trevor v Whitworth.6 In such case, director may be liable for civil penalty order: s256D(2)

  2. Danger that payment of dividend may result in insolvent trading in breach of s588G. Directors may be personally liable to creditors (s588M) as well as subject to civil penalty order: s1317E

  3. Directors may also be in breach of fiduciary duty to creditors where dividend payment causes insolvency: Hilton Ltd v Hilton (1988) 4 NZCLC 96-2657

  4. hareholders and creditors may go to court seeking an injunction to stop the payment of a dividend if insolvency would occur: s1324INVESTMENT LAW 3S8

6Trevor v Whitworth

7Hilton Ltd v Hilton (1988) 4 NZCLC 96-265

Affairs of the company

There is a clear stipulation on how the affairs of any given company out of which deviation are determined. In addition, there are various ways which members of any given company may seek a remedy in cases where the controllers of the company have acted unfairly. In many cases, this occurs where members or shareholders are unable to work together in a proper way. There are many statutory regulations that are aimed at ensuring that the minority members in any company are able to bring an action against those who are in authority and act unfairly.

The oppression remedy

The remedy allows for a flexible range of remedies that are thought to be appropriate by the court under various circumstances. It is also important to note that the court might take an order in cases whereby the company’s affairs have been conducted in a manner that is contrary to the interests of members as a section or as a whole. This involves actions that have been deemed inappropriate such as being oppressive or in a manner that is prejudicial and discriminatory against members that are involved. A statutory derivative action allows an individual shareholder to bring legal proceedings on behalf of the company in cases whereby the company fails to do so. This involves enforcement of rights against directors whenever they have breached duties to their company. 9

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Section 232: Action for oppressive or unfair conduct

There are a wide range of remedies that have been provided under this section that allows members or shareholders in any given company to prove that they have unfairly been treated. This in most case involves cases whereby a director refuses to register or transfer shares of a given member. This section provides cases whereby a court may take action against a director on matters pertaining how the company’s affairs have been conducted or a case whereby a resolution has been passed and it is found to be contravening interests of members of the company or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.10

Action by the court

Proceedings that involve such cases may see the court take various decisions that involve ordering that the company be wound up or the constitution of the company to be halted. This will mean that all rules that govern dissolution of any given company to be brought on board and that resources be divided as stipulated. The court might also order that shares of the company be sold in a way that the majority is able to buy shares of the minority in the same company.

Section III: Application of the law

The best option that can be applied or taken by Mary in this case is a personal action against Jason and peter and not a derivative because it involves purely corporate issues and dealings that affected her as an individual.INVESTMENT LAW 5

Factors to be considered

It can be noted that indeed Mary is a member of Newtown Company and a shareholder despite having any personal relationship with Jason. Formation of this company does not involve any family matters and therefore an issue out of question. A derivative action needs to be taken because as active directors of the company, Jason and Peter have acted unfairly acted towards Mary and contrary to the running of the activities including defrauding the company money through conspiracy.

Oppression action

An oppression action under section 232 is the best when it comes to this situation because it will allow the court to determine unfair dealings in the company by these directors and be able to offer an appropriate direction towards that.

Unfair or prejudicial actions by the Jason and peter towards Mary include

  1. Conspiring and getting large amounts of money through consultation fees without her knowledge when she is part of the company’s foundation.

  2. Refusing to pay members dividends as requested by Mary while the same is provided for under section 232.

  3. Running affairs of the company in a manner contrary to her interests with an aim of ensuring that they maximize profit on their side.

  4. Denying Mary an access to the books of accounts when they indeed know that as a shareholder, she also has the right to accessing books of accounts.11

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  1. Refusing to carry out a sale of shares belonging to Mary and thereafter offering to buy them at a price that is lower

All the above atrocities can only be solved if Mary launches proceedings in a court through the oppression remedy since all actions by these directors are found to be prejudicial and unfair. 12

Section IV: Conclusion

This is a case that involves a serious breach of duty by directors towards their company while at the same time acting unfairly towards their partner. If Mary takes a personal action against Jason and Peter, she is likely to emerge victorious because there are so many unfair dealings that have been done towards him.

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References

University of Canberra, Australian journal of corporate law (5th ed, 1995)69

Baxt R, An annual survey of Australian law (7th ed, 1993)35

Pont D, Equity and Trust in Australia (2010)77

Halloran K, Charity law and social inclusion (2007)100

Kern Corporatiointerstsn Ltd v. Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at p. 191

Hilton Ltd v Hilton (1988) 4 NZCLC 96-265

Trevor v Whitworth