Investment law Essay Example

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Topic: Investment Law


Business operations form an integral part of people’s lives as they improve their standards of living and the economic productivity of a nation. This means that issues relating to investments in business ventures by individuals ought to be handled with utmost care. This will endorse provision of profits and satisfaction to the investors and therefore improve their social and economic life styles (Keay, 2007, p.299). The directors and financial officers concerned with the operations of companies ought to be knowledgeable on the needs of shareholders and abide by the stipulated regulations and investment laws. This has an implication that the company has a well designed regulatory framework of its activities; such as determining the appropriate sources of funds, mode of issuing shares and debentures among other tasks.

In addition to the requirements of ensuring that there is compliance with general and specific laws applying to a company’s operations, directors have a primary duty of serving the interests of shareholders or investors. There are cases when companies face risks of insolvency and this stretches the duties of the directors to include creditors and employees with outstanding entitlements (Hetzel, 2009, p.3). Regardless of these affirmations, directors ought to exercise their duties in good faith in the best interests of the company and not to cause detriment to the company. This statements form a spring board over which investment law will be analyzed in the case of Bazza Ltd (Bazza). Issues relating to the explorations of the company will be assessed relative to the set investment laws and then conclusions on duties of directors will be made.

Analysis of the IssuesThe Case of Bazza Ltd (Bazza)

Issue 1: Rhett and Annie are optimistic despite explorations being termed futile

Rhett and Annie are the executive directors of Bazza Ltd and this means that they are endowed with tasks of ensuring that the company operates within the interests of the shareholders. They have to ensure that they are properly informed about the financial position of the company and ensure that the company does not trade if it is insolvent or is facing risks of insolvency (Sornarajah, 2010, p.199). It is indicated that after drilling a number of different areas, Bazza Ltd commissioned a geological survey to examine the material gained from drilling sites and results showed that there were low levels of recoverable minerals.

Law relating to issue1:

Under section 172 of the Companies Act 2006, directors are expected to act in ways that they consider, in good faith, would be most likely promote the success of the company for the benefit of its shareholders as a whole (Robertson, 2001, p.31).

Analysis of Issue 1:

From the geological survey, the directors of the company were informed on the status of regions explored and drilled as being unprofitable. $ 6000,000 was spent on the exploration and this was not accompanied with any benefits to the company and its investors/ shareholders. On being issued with information by the survey, Annie and Rhett are still optimistic concerning the explorations and drilling of the areas so as to find high value minerals. Directors of business organizations ought to have regard for the consequences of any decisions that they make. This means that they have to exercise reasonable care, skill and diligence in their choices (Reiter, 2006, p.465). The executive directors ought to have convened a board meeting with the help of legal and economic advisors and financial analysts. This could have acted as a basis for making decisions with regard to the interests of the shareholders of the company.

Conclusion from Issue 1:

From the analysis of the issue presented in the case of the directors of Bazza Ltd, it is evident that they had divided thoughts concerning the way forward for the operations of the company. Annie and Rhett; who are the executive officers of the company, remain optimistic despite the report presented by the geological survey. In this regard, the executive directors did not exercise care, skill and diligence as stated in the Companies Act 2006. In the convention of the meeting they did not invite legal and financial or economic analysts and advisors (Andrew, 2008, p.147). They ended up divided and because of their executive posts in the company, influenced other directors to continue with the fruitless explorations. These assertions imply that Rhett and Annie have breached their duties as directors of Bazza Ltd.

Issue 2: Wallace and Barbette are less enthusiastic and want the available capital returned to investors

Bazza Ltd was established with an aim of generating profits to the investors, through engaging in exploration and mining activities within the Kimberly region of Western Australia. Given that there are conflicting concerns in the company over the continuation of the operations of the company, Barbette and Wallace have a task of ensuring that they avoid conflicts of interest (Tomasic, Bottomley & McQueen, 2002, p.281). This assertion is documented in section 175 under the Companies Act 2006.

Law relating to issue 2:

Directors of companies have a duty to avoid conflicts of interest; this is articulated in section 175 of the Companies Act 2006. This task covers actual and potential conflicts, including those relating to the exploitation of any property, information or opportunity for personal reasons or to the detriment of the company.

Analysis of issue 2:

Formation of any limited company is done under legally established procedures and policies. The goals and objectives of the company are to be met in relation to the memorandum of understanding agreed upon by the shareholders. After a geological analysis of the region, the explorations of the mining regions are viewed as unsuccessful and this is accompanied with losses as more funds are used up (Reiter, 2006, p.467). There seems to be conflicts of interests among the directors of the company and this has to be addressed amicably by considering their legal obligations in relation to investments by the shareholders. The ventures and operations of the company are specific and known by the shareholders, and this means that all the decisions undertaken by the management board have to be in the best interests of the shareholders. This will not only endorse profitability of the company but also facilitates transparency and accountability among those bestowed with duties as directors of the company.

The directors are also supposed to act within powers stipulated in the company’s constitutions so as to promote successful conduct of its business operations. All resolutions and agreements which relate to the company’s constitution and decisions taken by shareholders ought to be legally treated by the directors of the company (Campbell, 2008, p. 231). This insinuates that directors of the company cannot alter any statutory requirement placed on them by the company’s constitution. Adoption of such policies and legal requirements will safeguard the investments made by the shareholders and promote the success of the company. There seems to be interplay among many legal requirements stated in the Companies Act 2006 as far as the roles of directors of companies are concerned. Being acquainted with the stipulations of the investment regulations is vital in ensuring that firms make well informed decisions concerning shareholders’ investments.

Conclusion on Issue 2:

Having proper understanding of the investment legal obligations and objectives of a company is imperative to directors of firms. The directors ought to generally monitor the company’s financial position for any indication that it might not be able to pay its debts as they fall due. Directors ought to investigate financial difficulties and assess the options available to the company to deal with the financial difficulties (Keay, 2007, p.297). Wallace is the chief financial officer (CFO) of the company and is therefore indebted to consider the company’s solvency before the company incurs each new debt. Before stating that funds should be redistributed back to the investors, Wallace and Barbette ought to have evaluated other potential opportunities of the company. For instance, other regions in Australia could be explored for valuable minerals or a meeting could be convened with the stakeholders to divert the business into other operations for the benefit of the shareholders (Sornarajah, 2010, p.203).

The consideration in this context is related to the identification of solvency aspects of the company. There is a need for seeking appropriate advice from suitably qualified, competent and reliable individuals. This means that the directors should have collectively settled on a single decision with which all of them are satisfied, if executed, will be in the best interests of the investors (Andrew, 2008, p.151). Wallace, being the CFO, was supposed to analyze the financial position of the company and determine whether the company could be having risks of insolvency. This could have then acted as a basis for restructuring the company’s affairs to enable it to meet its obligations and thus return the company to a long-term financial health. The directors are also supposed to act in a timely manner based on the pieces of advice they receive from experts, and in this case were the results from the geological survey.

Comprehensive Analysis of Breach of Duties by the Directors

From the case analysis relating to directors of Bazza Ltd, it can be deduced that they acted contrary to some of their duties as directors of the company. In spite of the provisions of the Companies Act 2006 concerning enhancing success of the company, avoiding conflicts of interest and seeking professional advice in executing care, skill and diligence in the operations of the company is vital (Campbell, 2008, p. 230). Irrespective of the powers bestowed upon the directors of the company by the articles of association and the memorandum of association, it is also the responsibility of the directors to work in accordance with the needs of the investors/shareholders.

Annie and Rhett are the executive officers of the company, Rhett being the chief executive officer. By virtue of them being executive officers of the company does not imply that they are the sole decision-makers of the company. There is need for a coordination of activities in the organization, its ventures and legal or economic analysts who can offer valid and appropriate advice on the operations of the company (Andrew, 2008, p.148). Rhett has to receive information concerning the chief financial officer because he has adequate knowledge concerning the solvency and/or insolvency status of the company. The fact that the executive officers did not make consultations with Wallace, the CFO and other legal advisors on the status of the company and the best possible step to be undertaken makes them to be viewed as to have breached the course of their tasks.

Barbette is the chair of the board of directors and is therefore responsible for seeking expertise from other reliable and competent people as regards the operations of Bazza Ltd. In the instance when the company had spent $6,000,000 in explorations and drilling in areas around Kimberly so as to determine the value of the minerals, there were mixed views (Keay, 2007, p.302). The heated arguments between the directors on whether to continue with the explorations or to return the share capital to the shareholders/investors could have been well resolved through an experts’ aid. The chair of the board of directors is influential to the decisions made by the company as stipulated in the articles of association and legislative measures regarding the operations of the business unit.


The company continued with its explorations and it is noted that by the end of 2009 financial year all the funds had been spent and no major discoveries on recoverable minerals had been found. Basing on the investment formalities and legal obligations, it is the duty of the directors of the company to assess the financial position of the company (Campbell, 2008, p. 224). From the analysis of the case, it is clear that the firm has been engaging in explorations regardless of the loss of funds. This indicates that the directors did not convene semi-annual and quarterly meetings with the shareholders and experts to make informed decisions concerning the operations of the company. Shareholders invested their resources in the company and they expect returns, however, the directors have failed them and this means that they did not conduct the commercial activities of the firm in the best interests of the investors. They do not have any arguable defense against their breach of their duties and should be held liable for negligence and continual operation yet the company was at risk of insolvency (Robertson, 2001, p.39).


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