Paper Code: LAWS305-16Y (HAM) THE UNIVERSITY OF WAIKATO SRZE5 Te Whare Winangs 0 Waikato 2016 B SEMESTER EXAMINATIONS DEPARTMENT PAPER TITLE TIME ALLOWED NUMBER OF QUESTIONS IN PAPER NUMBER OF QUESTIONS ‘TO BE ANSWERED VALUE OF EACH QUESTION GENERAL INSTRUCTIONS SPECIAL INSTRUCTIONS CALCULATORS PERMITTED Te Piringa - Faculty of Law Corporate Entities ‘Three hours TEN FOUR All questions are of Equal Value Section A — answer TWO questions. Section B — answer TWO questions, This is a CLOSED book examination, Attached: Relevant case law authoriti statutory provisions. and No electronic devices are allowed TURN OVERPaper Code: LAWS305-16Y (HAM) SECTION A (Answer TWO questions from this Section) QUESTION ONE ‘AMO, a company incorporated in New Zealand, is looking for a building for its main office. Jonathan Franzen and Margaret Atwood are the most senior members of the Board of Directors and are deeply involved in the day-to-day operation of AMO, while a new Managing Director is appointed. The Board has seven other members. Franzen starts looking for potential property. The transaction falls within the scope of competence of the Managing Director. Franzen finds a property in Hamilton. It is owned by Zahid Ltd. Its Managing ctor is Toni Morrison. Franzen and Morrison meet for the first time on August I and start, negotiations. Morrison attends an AMO Board meeting to discuss the negotiations on August 6. There, Franzen tells Morrison that he is acting as Managing Director. There is another meeting between the parties on August 13. Atwood, and two other directors attend the meeting representing AMO. Atwood tells Zahid Ltd that she has authority from the Board to bind AMO from time to time. The other AMO directors remain silent. The parties agree on the price of the property during this meeting. On August 15, there is an AMO Board meeting attended by Morrison, There, the Board discusses the need to appoint a Managing Director to carry out the negotiations. On August 17, a meeting takes place and is attended by Franzen, James Baldwin, an AMO assistant vice-president, three other AMO directors, and Zahid Ltd’s Morrison dealing with the terms of payment. No agreement is reached on this topic. Zahid Lid calls Franzen and he tells it that Baldwin will be dealing with the negotiations from now on. Baldwin and Zahid Lid’s. Morrison meet several times, until a full agreement is reached. Atwood is unhappy. At a formal meeting of AMO’s Board it is decided that the deal between Baldwin and Zahid Ltd cannot bind AMO. There is litigation based on the Companies Act. The judge sides with AMO. You are her clerk and have to offer the legal reasoning for the conclusion, [25 Marks] QUESTION TWO Orham Pamuk and others are planning to incorporate a company based in Hamilton. It will make sports clothes and products to be sold mainly in this city. Pamuk submits an application to reserve the name like NZ Ltd. The name Nike NZ Ltd. is already registered. Also based in Hamilton and in the same industry, Nike NZ. Ltd. sells its products under the trade name Nike and owns several shops in Hamilton. You are the Registrar and have to decide on the application Provide a detailed explanation based on what the Registrar must and must not take into account. [25 Marks] QUESTION THREE Kiwi Transport Limited (‘Kiwi’) is a company duly incorporated under the Companies Act 1993. Kiwi’s directors are John Appleby, Dion Dynamic, Sam Sinister, Anton Archibald and Craig Crooks. Kiwi operates a business providing long distance bus and coach transport services to cities in the North Island, for budget travellers. Kiwi has engaged the services of TURN OVERPaper Code: LAWS305-16Y (HAM) reputable business analysts who have reported that Kiwi’s business is projected to be profitable in the medium to longer term provided no competitor provides similar long distance inter-city services. Despite this report, Dion and Sam are deeply concerned about the business strategy and future direction of Kiwi in the medium to longer term, Dion and Sam have consistently held the view that Kiwi’s current operations of simply servicing the major cities is a high risk strategy. This is partly because it could easily be undermined by a competitor. For the continuing viability of Kiwi’s business, Dion and Sam are convinced that Kiwi should also provide minibus services between smaller towns/urban centres and the cities on Kiwi’s transport routes. Dion and Sam have convinced Kiwi's board of directors to com to the financial viability of the minibus venture. Approval has also been granted by board to carry out surveys among potential users of the minibus service. The response from the surveys is overwhelmingly positive and in support of the venture. The feasi report strongly supports a business case for the minibus service. The report cl that the minibus service will be a lucrative business venture either for transporting commuters from smaller towns to cities and back or as a feeder service to Kiwi’s inter-city transport service. These outcomes are duly reported to Kiwi’s board of directors. ‘A board meeting is convened at which the proposal to commence the operation of the minibus service is discussed. There is serious debate and consideration given during the meeting to the potential user survey results and feasibility study report. The meeting however concludes, with a clear division of opinion on the minibus passenger service proposal. The majority of the board consisting of Anton, Craig and John, consider the venture to be a very high financial risk, which makes it not worth pursuing and they become vigorously opposed to the venture. n and Sam who both also reside in the small towns of Waihi and Taneatua, are convinced that the minibus venture would be financially very lucrative and a good insurance policy for Kiwi in the event of serious competition on the inter-city routes. The relationship between Dion and Sam on the one hand and the majority of the board on the other has seriously deteriorated resulting in the two selling their respective shareholding to the majority shareholders and resigning from Kiwi’s board ‘A new company, Express Minibus Limited (‘EML’) is formed by Dion and Sam, in order to carry on a minibus business. Dion and Sam each own 50% of the shareholding in EML. The minibus business proves to be very successful as had been envisaged by Dion and Sam. Kiwi’s directors become aware of EML’s success. Kiwi’s directors resolve to take legal action against Dion, Sam and EML. The action is for breach of directors’ duties to Kiwi. ‘Advise them on what duties they may have breached. If they are found to have been in breach, advise them on the appropriate remedies a court would likely order against them. [25 Marks] QUESTION FOUR — Answer ALL parts Waikato Haulage Limited (“Waikato”) is a large company involved in the road transportation business. It has for many years operated as a successful business from its base in Hamilton. Its principal business activity has been that of transporting livestock in and around the North Island of New Zealand. Due to a severe downturn in livestock farming, there has been a TURN OVERPaper Code: LAWS305-16Y (HAM) corresponding reduction in demand for its services as a livestock transporter. As a direct consequence of the difficult trading environment, Waikato sustains heavy losses in its trading, operations. This has resulted in the company encountering difficulties in fulfilling its debt obligations to creditors and it has also had to make a number of its loyal staff redundant. Further, in order to meet liability in respect of wages for its remaining staff, it has had to defer payment of amounts due to Inland Revenue for PAYE tax as well as GST and income tax. As a consequence, Waikato has come under considerable pressure from creditors to make payment in satisfaction of its numerous debts. Despite reservations relating to the company’s solvency, Waikato’s board of directors makes the policy decision to allow the company to continue trading. This decision is based on the realistic prospect of demand picking up in the near future. The Waikato Livestock Breeders’ Association has shared rather accurate projections with Waikato of a very imminent increase in livestock numbers throughout the Waikato and across a wide range of livestock categories. However, one director, Warren Duncan, disagrees with the board's decision, Warren is firmly of the view that the trading environment is rather hostile. He is also of the opinion, that there are no short to medium term prospects of any significant improvement in the business climate and that in order to avoid any liability being imposed on the board, Waikato should cease trading forthwith. Underlying Warren’s concerns are the implications of the Companies Act 1993, now that the board has resolved to allow the company to continue to trade. Under the Companies Act 1993, directors are not required to wind up a company when it does not meet the solvency test. They must however proceed with care in conducting the affairs of the company. In light of the circumstances outlined above, advise Waikato’s board of directors. As part of your advice, include as appropriate, relevant case law and statutory authority. Also include a discussion of the following: 1. What circumstances would justify a decision to allow Waikato to continue to trade? 2. How ought the directors to act in order to justify the decision to continue trading? 3. Why has liability been imposed on directors who have continued to trade? [25 Marks} SECTION B (Answer TWO Questions from this Section) QUESTION FIVE Discuss the ambit of the definition of * 193, rector’ as contained in s 126 of the Companies Act [25 Marks] TURN OVERPaper Code: LAWS305-16Y (HAM) QUESTION SIX - Answer ALL parts You are a lawyer working for the New Zealand Companies Office. The Minister of Justice has asked you to prepare an opinion on a proposed amendment to the Companies Act 1993. This change would make it mandatory for directors and boards to give consideration to the social and environmental impacts that their decisions would have on the local communities in which they operate as well as to the overall financial well-being of the company. The legislation would: 1) enable the new statutory stakeholders, such as representatives from the local community, to bring actions against directors for breach of fiduciary obligations, such as the requirements to exercise powers for the proper purpose; and 2) require a company to gain approval of a statutory body before either closing or down-sizing the operation. The Minister requests an opinion from you on the viability of such legislative change. Critically discuss the viability of such legislative changes outlining the advantages and disadvantages of corporate social responsibility (CSR) theory and practice, any options under the current Companies Act 1993 and other New Zealand legislation for CSR, and any additional suggested amendments to incorporate CSR more effectively. [25 marks] QUESTION SEVEN- Answer ALL parts A number of Iwi, hapit and other Maori communities and corporate entities are looking to collaborate more in their commercial and even social activities. Effective collaboration coupled with good governance and active management are the way of the future for many successfull Maori commercial ventures. 1) What are some distinct factors unique to Maori as opposed to non- Maori commercial ventures? 2) What are the significant advantages for Maori entities to collaborate on commercial activities? 3) What are some key challenges for Maori entities to collaborate on commercial activities 4) Please provide evidence from at least one case study of current Méori collaborative commercial activities, [25 marks] QUESTION EIGHT “The passage of over a century since the Incorporated Societies Act 1908 was enacted has inevitably thrown up the need for some revision of it. Particularly this is so as to the obligations of those running such societies. ... Societies are private bodies that TURN OVERPaper Code: LAWS305-16Y (HAM) should be self-governing and largely free from inappropriate state interference. Societies should include modem governance provisions ... and should set out better procedures for resolving disputes.”" 1) Given that much of the litigation of incorporated societies is based around resolution. of internal disputes between members of committees of management and the committee of management and society members, what new legislative amendments are suggested in the current Incorporated Societies Bill to deal with disputes? 2) What is the current law regarding the legal duties of a committee of management of an incorporated society? 3) What is the current law regarding the potential liabilities for members of a committee ‘of management? 4) What are the proposed amendments to the legal duties of committees of management in the new Incorporated Societies Bill to modernize governance provisions? 5) Do you agree or disagree with the proposed governance changes? [25 marks} QUESTION NINE David and lan had for many years baked bread as a way of making a living. They baked the bread at their home and sold it at various health shops around Hamilton. As interest in their bread grew, David and lan found their kitchen at home to be too small to cope with the demand and set about seeking an industrial kitchen from which to base their enterprise. Dough Ltd was an old style bakery whose custom was dropping off at an alarming rate as their customers became more health conscious. They were looking to consolidate their operation and upon hearing of David and Ian’s search for new premises and the increasing demand for their product, Dough Ltd proposed that they should form a new company together called Upper Crust Ltd. David and lan accept the proposal to form the new company. David and Ian would own 49% of the shares, hold two of the five seats on the board and be the managers, while Dough Ltd would own 51% of the shares and appoint the remaining three directors. David and lan would make available their successful bread recipes to Upper Crust. Ltd and provide the necessary training to employees. Upper Crust Ltd traded successfully for seven years with Dough Ltd providing further capital ‘whenever it was needed for expansion. But when Dough Ltd no longer needed David and Ian’s services because it now had their method of bread making well in hand, Dough Ltd tried to buy them out, offering them $4.00 per share in Upper Crust Ltd. David and lan thought the price to be far too low, $10.00 per share being a far more realistic price. * Law Commission, A New Act for Incorporated Societies (NZLC R129, Wellington, 2013) ati. TURN OVER7 Paper Code: LAWS305-16Y (HAM) In retaliation, Dough Ltd refused to provide further capital when it was badly needed. It also instructed its representatives on the board to consistently outvote David and lan on management decisions and whenever possible to divert business away from Upper Crust Ltd in favour of Dough Ltd itself. Advise David and lan of their remedies as shareholders of Upper Crust Ltd. [25 marks} QUESTION TEN Corporate collapse is a normal part of corporate life. The main causes for corporate collapse include natural disasters, poor management and governance, insolvency of key customers ot suppliers, failure to keep accounting records, changing markets, and personal crises of owners and managers. When a company faces insurmountable financial difficulties on the road to corporate collapse, the viable options include receivership and liquidation. 1) What is the difference between receivership and liquidation proceedings? 2) What is the solvency test and what factors do directors need to take into account when determining whether or not the test is satisfied? 3) What is the process for distribution of assets when a company is in liquidation including priority of creditors? 4) Explain what is a statutory demand and in what circumstances this can be applied by the Court? [25 marks} END