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Where are the replaceable rules found?

-located at Corp Act s141 Give three examples of replaceable rules. Appointment and removal of directors (s 210G and 203C) , Powers of directors (s 198A), inspection of books (s 247D), What is the legal effect of a company’s constitution or its replaceable rules? A company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract: (a) between the company and each member; and (b) between the company and each director and company secretary; and (c) between a member and each other member; under which each person agrees to observe and perform the constitution and rules so far as they apply to that person. What is the relevance of Hickman’s case? In Hickman v Kent or Romney Marsh Sheep-Breeders Association, Hickman had a grievance with the Association and went to court regarding the grievance. However the Articles of Association stated that all grievances must go to arbitration. Therefore, by going to court, Hickman was breaching the conditions set out in the Articles of Association. How can a company alter its constitution? A company may modify or repeal its constitution, or a provision of its constitution, by passing a special resolution A special resolution requires at least 21 days notice (28 days for public listed companies) and the agreement of a 75% majority of votes cast (refer s9, 136, 137, 140, 249H and 249L) How does the law limit the company’s freedom to alter its constitution? Alteration of constitution to compulsory acquire shares of minority shareholders will only be valid if done: for a proper purpose; and is fair in the circumstances: HC in Gambotto v WCP Ltd (1995) What is the difference between express and apparent authority? the greatest difference between actual and apparent authority in determining the existence of authority is simply who has been informed about the agent's power( eg. s 198A) Actual authority exists when the principal has notified the agent of the agent's authority. The extent of actual authority depends on the instruction given by the principal to the agent and the agent's reasonable understanding of the instruction. Apparent authority exists when the principal has notified a third party that the agent has power. What are the legal requirements for apparent authority (hint: see Freeman & Lockyear case) it must be shown that: -a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; -such a representation was made by a person or persons who has 'actual' authority to manage the business of the company, either generally or in respect of those matters to which the contract relates; -the contractor was induced by such representation to enter into the contract, i.e. that he in fact relied upon it; and -under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to an agent. What is the indoor management rule and its purpose? The Indoor Management Rule is a rule at company law allows outsiders3 dealing with a company to make assumptions about the internal consistency of decisions made by a company with its rules. By the help of the indoor rules a third party is allowed to make some assumptions such as there is no procedural defects while appointing directors, a director's board meeting was properly called and held, board approval required has been obtained. When will the indoor management rule not apply? the indoor management rule does not apply where an employee took action outside of the ordinary course of the corporation’s business and accordingly beyond the scope of authority an employee could be expected to have.

a director’s reliance on another’s advice is held to be reasonable if: the reliance was made: a in good faith. consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. What are the sources of a director’s duty of care. skill and diligence? The BJR essentially provides a defence to any breach if you can establish that you: -made the business judgement in good faith and for a proper purpose. and . in proceedings for a potential breach of directors’ duties. An objective test is applied in s 128(4) to determine whether a person knew or suspected that the assumptions were incorrect. Pursuant to section 198D. it is not a.fixed and immutable term. disqualification order) But not a criminal offence for this duty (s 184 exclusion) What basic skills are directors expected to possess? expected to have basic skills in relation to financial statements and financial affairs of the co as required by s295(4): These include the following: (at [17]): a [basic] understanding of the business . but is quite protean and varies according to the duty and the circumstances.do not have a material personal interest in the subject matter of the judgement. and . that the delegate was reliable and competent in relation to the power delegated what is the business judgment rule? A rule operate to reduce the severity of the standard of care demanded of director.. at the time of the dealings. compensation order. in good faith. in good faith and in the honest belief that the action taken was in the best interest of the corp. A belief will be rational unless it is a belief that no reasonable person in your position could hold. that the assumptions in s 129 are incorrect. The rules presumes that officer and director have made all their business decision on informed basis. and .. 190 and 198D assist in determining when directors may reasonably rely on the information or advice of others and their responsibility for the Corporations Actions of delegates.What is the relevance of the High Court decision in the Northside Developments case? What is the relevance of ss 129 and 128 of the Corporations Act? A person can still make the assumptions in dealings with the company when an officer or agent of the company acts fraudulently or forges a document in relation to the dealings (s 128(3)) unless the person knows or suspects. or “having implemented such a system of controls.6 Can the same standard of care be expected of both executive and non-executive directors? Yes (Daniels v Anderson) What are the possible legal defences to a breach of directors’ duty of care. and after making proper inquiry.”5 The steps that a board needs to take to discharge this duty are called due diligence.and become familiar with the fundamentals of the business in which the co is engaged Keep informed about the activities of the co monitor the corporate affairs and policies (not required to have detailed awareness of day-to-day activities) Directors should have a questioning mind (not required to be an auditor) How are directors expected to discharge the element of “diligence”? directors would not have discharged their fiduciary duty if they “utterly failed to implement any reporting or information system or controls” regarding the prevention of misconduct. if needed. skill and diligence? Exists at Common Law (and enforced by the company) Exists under s 180(1) of Corporations Act 2001 (Cth) (with degree of overlap) – can be enforced by ASIC or the co who can apply to the court for: A declaration of contravention (breach): s 1317E A civil penalty (fine.informed yourself about the subject matter of the judgement.rationally believe the judgement is in the best interest of the company. and place the burden of rebutting this . To what extent can directors delegate and rely on others inside the company to do their job properly? Sections 189. A director is responsible for the exercise of delegated power unless: the director believed on reasonable grounds.

or some other improper purpose.1. there are certain rights and obligations that are attached to the role. ensure co’s financial stability. The remedy is available against any person who controls the company.presumption upon shareholdes challenging the boards What is the significance of the decisions in Daniels v Anderson (1995) 37 NSWLR 438 and in ASIC v Adler (2002) 20 ACLC 576 for company law? The aforementioned case was primarily dealing with non-executive Directors and their duties to a Company. and may be contrasted with the difficulties faced by unincorporated associations seeking to enforce legal rights. Corporations Law ss 232-234) Members can seek relief from oppression under s 232. For what purposes can directors cause the company to issue shares? A director must exercise the powers that are vested in him for the purpose for which they were conferred and not for some personal or collateral.  An actual or proposed act or omission by or on behalf of the company. -If members have personally been wronged. Directors must use powers for their proper purpose Courts have held directors may exercise power to issue shares to: raise capital when required (Howard Smith). even if there is no immediate need for capital. and Attend board meetings when reasonably able to attend. It actually did not allow members to sue on behalf of their company. enough to satisfy the above list. unfairly prejudicial to or unfairly discriminatory against. Can a director be excused by the company for breach of their statutory duty under the Corporations Act? If a director fails to observe the statutory duty of due care. Acquire an understanding of the business and the financial position of same. these duties include. . Briefly. Who can bring proceedings under the oppression remedy 1. It should be noted that a Director is not required to have detailed knowledge of the Company’s day -to-day activities. the court may also order the return of any profit gained. and manipulate voting power (Howard smitch. a member or members. What is the current legal status of the rule in Foss v Harbottle? The ability of minority members to seek rights of action at common law was restricted by the rule in Foss v Harbottle (1843) 2 Hare 461. distribute reserve of profits by way of bonus shares When will directors be criminally liable for breach of their duties? When a person is a director of a corporation. whitehouse) which may cause detriment to the company. This right of action now only exists under the Corporations Act 2001. action may be taken on its behalf by minority members. he may face criminal prosecution and can be fined up to $5. He is also liable to disqualification in which case he is not allowed to be involved in managing any company for a specified period of time. Oppression remedy (Part 2F. When directors are use their position improperly or exploit information gained from their position to their advantage(Ngurli Ltd v McCann). ss 236-242 and is known as the statutory derivative action. This was an important characteristic of companies. -A derivative action – where the company is the minority. but are not limited to the following:Putting themselves in a position to guide and monitor the management of the business. the minority members can take legal action under Corporations Act 2001. majority shareholders and the company itself. that is the injured party. The remedy is available there:  The conduct of the company‟s affairs. What are potential sources of a member’s personal rights if the company has been wronged but the board decides not to take action or if the majority of members ratify the harmful conduct at general meeting. If a general duty of care is breached. take advantage of a genuine commercial opportunity.000 or imprisoned up to a year.  A resolution or a proposed resolution of members or a class of members  Oppressive to. or payment of compensation or damages to the company. they may be able to take action under s 232. This may include directors. s 461 and s 1324 and also at common law if their personal rights have been infringed.

What conduct is covered by s 232?  Diversion of business opportunities  Unfairly restricting dividends  Breaches of directors‟ duties  Share issue for improper purpose Explain the relevance and operation of the oppression remedy.1A. Wayde v Rugby League Ltd What remedies are available under the oppression remedy Remedy is available if member can show commercial unfairness. former member. director and former directors may take legal action on the company‟s behalf if they have the court‟s permission to do so. A court must grant permission if the following circumstances are met:  It is likely that the company will not sue on its own behalf. or (ii) An officer or former officer of the company22 What must the shareholder prove to the court in order to get judicial consent to use the SDA? Court may do so only if following criteria are met (s 237(2) sets out the standing requirement): Its probable that co won‟t initiate litigation. or intervene in proceedings to which the company is a party. former members. or unfairly prejudicial. and Co has been notified 14 days in advance of this application and reasons . The affairs of listed companies are also under closer public scrutiny. and Its co‟s best interests for leave to be granted. Why do the oppression cases mainly involve members in proprietary companies? Member or anyone with ASIC consent can rely on oppression remedy Member must prove the conduct of the co‟s affairs or its actions or resolution (past. the directors have breached s 232: Rugby League case Who can bring proceedings under a statutory derivative action (SDA)? S 236 (1)(a) sets out the categories of persons who may be permitted to bring proceedings on behalf of the company. Nevertheless there have been several cases involving listed companies where the oppression remedy has been used as means of challenging actions of directors that involved a breach of duty. S 237(2) Corporations Act 2001. •No need to show unlawful or dishonest conduct by others.and Applicant is acting in good faith. or person entitled to be registered as a member of the company or of a related body corporate.  The applicant is acting in good faith.2. and There is a serious question to be tried. Lasted companies must comply with ASX listing rules.  It is the company‟s best interest to grant the permission. the majority unfairly imposing their will on the minority. It is the effect of the conduct that is important – is the effect oppressive? • Courts use an objective test (how would a reasonable person view the conduct?) ‘was the decision made by the director a decision that no board of directors acting reasonably would have made? If so. These force listed companies to gain shareholder approval where they seek to make certain structural changes. and  The applicant gave the company 14 days notice of the applications for permission or the court is willing to grant permission without such notice. Case: Wayde v Rugby League Ltd (1985) 3 ACLC 799 Derivative Action (Part 2F. or Unfairly discriminatory against them Proprietary companies offer more scope for the majority to abuse their positions. current or future) was either: oppressive. for eg. Corporations Law ss 236-242) Under s 236(1) members.  There is a serious question to be tried. Such „persons‟ must satisfy the court that they are either: (i) a member.

BHP Co Ltd v Bell resources Ltd What conduct is caught by s 1324? it is not necessary to establish any special injury in order to seek the remedy. S 1324(1) allows application for an injunction to be sought for any contravention of the statute. and Enable true and fair financial statements to be prepared and audited . •General information includes: a review of operations. payment orders. and most large pty co‟s must prepare (annually): a financial report (which must be audited by a registered co auditor who must provide an audit report) and a directors’ report (unless exempt by ASIC). It must: Correctly record and explain co‟s financial position and performance. documents of prime entry and working papers. and –(if required by accounting standards) a consolidated profit and loss statement and balance sheet. receipts. Which companies must prepare annual accounts and reports? All public co‟s. What are the contents of financial reports? -profit and loss statement. Your private limited company‟s accounts may be exempt from needing an audit (reviewed and confirmed by an independent accountant). that is. and Details of compliance with applicable environment laws.unless the company‟s articles of association say it must or enough shareholders ask for one. s 1324(10) enables the court to grant an order for damages against any person acting in contravention of the statute. Details of any significant changes in co‟s affairs. apart from the granting of an injunction. An injunction is recognized as an order. the majority of the High Court rejected the above approach. unless the alteration went beyond the contemplated purpose of the powers as determined by the constitution. and were not required to take into account the particular interests of minority shareholders. Which companies are exempt from the need to prepare annual accounts Most small private limited companies don‟t need an audit of their annual accounts . – notes to the financial statements. Explain the relevance of the High Court decision in the Gambotto case. What are the contents of directors reports Must contain: General information in sec 299 and Specific information in sec 300. Details of co‟s main activities. It held that majority members could alter a company‟s constitution. What does financial record mean Sec 9: includes: invoices. or was oppressive. –a statement of cash flows. which restrains or directs particular conduct. and if any changes to them. Further. –a balance sheet. the Corporations Act 2001 (Cth).Who may apply for a statutory injunction and under what circumstances can the application be made?  ASIC or any person affected by the contravention of the statute may apply for an injunction: s 1324(2).

the client co may have a claim against the auditor for breach of statutory duty: for eg. Esanda sought damages for negligence against Peats and asserted that it would not have entered into the loan transactions but for its reliance on the audited accounts of Excel. Auditors have a duty of care and skill at common law and reasonable skill and care according to the professions standards. What is the relevance of Daniels v Anderson for the law on auditors? The issue was reliance by directors was a critical factor in considering whether they had satisfied the standard of the relevant duties. Esanda relied on the audited accounts and audit report when lending money to Excel. of the state of the company‟s affaires as at the end of its financial years and in the case of the profit and loss account. in AWA Ltd v Daniels (1992) 9 ACSR 383. where financial accounts have audited? FINDING In actions for negligence claiming economic loss is suffered in consequence of a statement made or advice given by a defendant the possibility that a member of class might rely on the statement or advice and thereby suffer loss has never been held sufficient to support recovery. (listed co can‟t use same auditor for more than 5 years in a row) •Must sign an auditor‟s independence declaration and maintain their independence from the audit client How are auditors removed? When auditor fails to comply with this statutory duty. What is the relevance of Esanda Finance Ltd v Peat Marwick Hungerfords for the law on auditors? FACTS Peat Marwick Hungerford (“Peats”). an auditor. the said accounts give the information in the manner required by this act. employee or employer of an officer or have a substantial shareholding in the co: s 324 •Must rotate after every 5 successive financial years. Esanda had not proven that Peats owed a duty of care to it to audit the financial accounts with due care and skill. of the profit or loss for its financial year 2. for eg: cannot be an officer of the co or a partner. What are the main aims of Chapter 6D of the Corporations Act primary function underlying Ch 6D of the Act is to address the imbalance of information between issuers of securities and potential investors: ASIC v Axis International Management Pty Ltd (No 5) [2011] FCA 60 2.to report to ASIC on breaches of the CA. The report must state whether in his opinion and to the best of his information and according to the explanations given to his. discovered as part of the audit. profit and loss account and on every other document annexed thereto which would be laid before the general meeting during his tenure of office. ISSUES In an action for negligence for pure economic loss is it sufficient to plead that it was reasonably foreseeable by an auditor that creditors and financiers of a corporation might rely on the audited accounts of the company in entering into financial transactions involving that corporation? Does an auditor owe a duty of care to every member of the class comprising creditors and financiers of the corporation. the auditor failed to report to members on co‟s failure to keep sufficient financial records What are the duties of auditors? 1The principal duty of the auditors is to make a report to the members on the account examined by him and on every balance sheet. 1. What types of disclosure documents can a company issue? Disclosure documents for an offer of securities are defined under s 9 to mean: . was alleged to have failed to comply with accounting standards when auditing the financial accounts.How are auditors appointed? Must comply with test for independence to remove all conflicts of interest: ss 324CA-CD. and give a true and fair view in the case of the balance-sheet.

Interim stop order (co must issue supplementary/replacement disclosure document and address ASIC‟s concerns to cure defect) Final stop order •Seek publicity orders from court against person in breach of Ch 6D •Seek banning orders (under s 206E) against directors in breach of CA . As Promoters control the fate and direction of the new co (they create and mould the co and are placed in a very powerful position to influence the co) 8. What is meant by “due diligence” and why is it significant during corporate fundraising? Due diligence is concept involving of promoters deal with the co. or -An offer information statement for the offer (used when co is raising $10 million or less) -Prospectus •Short Form Prospectus Can use with any offer Can refer to material lodged with ASC Investors entitled to copy of full material if they ask •Profile Statement Brief profile statement (shorter than short prospectus) Allowed if ASIC approves Prospectus lodged with ASIC – investors get copy if they ask •Offer Information Statement Can be used if amount to be raised $10million or less 3. they have a duty of full disclosure. including a short form prospectus (used when co is raising more than $10 million). or -A profile statement. ASIC can issue a stop order for a defective prospectus (s 739). cannot make personal profit without the fully informed consent of the co. co must either repay money or allow investor to withdraw application within one month after co has issued either supplementary or replacement documents 5. What are some of the policy considerations for exempting the need for disclosure documents for certain offers of securities? Prohibition on issuing securities if minimum subscription set by the co is not reached (s 723). promoters must avoid all conflicts of interest and place co‟s interests ahead of personal interests – for example. What is the role of ASIC and what powers does it have during corporate fundraising? For investor protection purposes. Assets and liabilities.-A prospectus. profits and losses and prospects. What type of activities can give rise to civil and criminal liability during corporate fundraising? Civil liability and Criminal Liability is imposed for: misleading or deceptive statements (see. 6. or -Failure to include new circumstances (s 728). When is a disclosure document required? Disclosure documents must be lodged with ASIC: s 727 •Exposure period (7-14 days) intended to give ASIC and the market an opportunity to consider the disclosure document before commencement of subscriptions for the securities on offer 4. NRMA case) or omissions in disclosure document. In general terms. financial position and performance. what information must a prospectus contain? The prospectus must also contain all such information that would allow investors and their professional advisers to make an informed investment decision (s 710) – includes: Rights and liabilities attaching to securities. 7. for eg. -Material omissions.

General Defences for liability (for other types of „DD‟) includes: lack of consent. Defendant can avoid liability if he/she can show that reasonable precautions were taken and that there were reasonable ground for belief that the statements were true and not misleading. -ASIC power to issue stop order (s 739) –Application monies held in trust (s 722) –Prohibition on issuing securities if minimum subscription set by the co is not reached (s 723).For investor protection purposes. co must either repay money or allow investor to withdraw application within one month after co has issued either supplementary or replacement documents 10. What are the defences for a defective disclosure document? Due diligence defence (s 731) for defective prospectus. any person who suffered loss or damages as a result of a defective prospectus can initiate civil action (s 729) – against : -Company -Directors -underwriters -Person named with their consent (such as experts. How does the Corporations Act ensure that disclosure documents remain reliable and up to date? Co‟s must issue a supplementary or replacement prospectus when the information becomes out of date during the life of the original prospectus (s 719). and reasonable reliance (ss 732. bankers. lack of knowledge. accountants and lawyers) 9. 733) .