BSL201 Finance Law Workshop Questions Chapter 1

Question One

Describe four differences between equity investors and debt investors.

1. Equity investors receive returns in form of dividend whereas debt investors receive returns
in form of interest
2. Equity investors have voting rights whereas debt investors do not
3. Equity investors, other than preference shareholders, receive variable amount of dividends
on a non-contractual basis depending on company’s performance and debt investors receive
returns on a contractual (loan agreement) basis based on outstanding loan.
4. Upon liquidation, the debt investors are ranked higher than equity investors for getting back
their capital invested into the company.

Question Two

Why are proprietary companies the most common type of company structure in Australia?

Proprietary companies are easy to set up as compared to other types of company with requirement
of one local resident director and company secretary is optional. The disclosure requirement is also
lesser as compared to others.

Public company requires at least 3 directors; two of which must be local resident and company
secretary is compulsory to be hired. There is also no limit to shareholders where the company’s
shares are publicly traded.

Unlimited company requires members’ personal liabilities to be unlimited by company’s debt and
therefore it is a high-risk operation for people who are setting up company.

Question Three

Describe four differences between public and proprietary companies, including why public
companies can raise so much more capital that proprietary.

1. Public company requires 3 directors; two of which must be local resident whereas
proprietary companies only required 1 local resident director
2. Public company is compulsory to hire a company secretary while proprietary companies has
the option to hire but not required
3. Public company can raise capital much more and quicker as compared to proprietary as
public company’s shares are publicly traded in stock exchange where investors can buy and
sell the public company’s shares while proprietary company’s shares can be bought and sold
but in a private arrangement which is difficult for investors to find another investors of
opposite view i.e. seller selling at XX price looking for a buyer willing to buy at XX price
4. Public company have no limited number of shareholders while proprietary companies have a
maximum of 50 non-employee shareholders
5. S113 Corp Act restricts proprietary companies
Question Four

Would you invest in a public company with unlimited liability? Explain why/why not and in your
answer make a comparison to the other types of company structure. Which one is the most
common to invest in (as a member/shareholder) and why?

This would depend on investors’ risk acceptance level. However, personally, I would not invest in a
public company with unlimited liability based on my risk acceptance level.

Unlimited company requires members’ personal liabilities to be unlimited by company’s debt and
therefore it is a high-risk investment and with such high-risk investment, investors will be looking for
high returns.

Ordinary/Preference shareholders of proprietary or public companies have limited liabilities where

they are only liable based on the subscription price for their investment in the company.

Shareholders is most common as compared to members since members require signing company’s
operating agreement or memorandum to be included as members. Any person who owns the shares
publicly or privately are shareholders of the company and for public listed companies, it will be very
easy to become a shareholder by purchasing shares on market value of the company and they will
be a shareholder.

Question Five

“All companies have members but not all companies have shareholders”. Discuss

A company limited by guarantee has members but no shareholders as it does not issue shares.

A company limited by shares issues share and owners of shares can be a shareholder and member

Question Six

In your own words, explain the following concepts:

 Separate legal entity – It is an independent entity where it has legal capacity to bind any
contract without using the owner’s name who incorporated the company. It is separate from
its owners or shareholders. S119 Corp Act
 The corporate veil – It separates the actions/liabilities of the organisation to the
actions/liabilities of the shareholders. Will not affect the shareholders behind the company.
 Piercing (otherwise known as lifting) the corporate veil – It is a situation where court decides
to remove limited liability and investors of the company will be unlimited to the company’s
liabilities and debts. – S588(g) Corp Act Director’s duty to prevent insolvent trading by
company
 The legal principle from the case of Automatic Self-Cleansing – Shareholders are only able to
influence the disposal of assets but not forced the Board of Directors of the company to
execute it as the power of management lies with Board of Directors.

Question Seven

You want to be a shareholder of a company. How do you achieve this?

If it is public listed company, I will need to go into stock exchange to purchase the shares on market
value or through a broker and I will be a shareholder of a company.
For proprietary company, I will need to find investors who own the shares of the company and
purchase from that investor in a private arrangement to become a shareholder of a company.

Question Eight

How do ordinary shares differ to preference shares? What is the most common of the two?

Ordinary shares dividends are pay out based on company’s decision and declared while preference
shares dividends are fixed percentage of issued price and they will be entitled to it regardless of
dividends declared. Hence, if company did not pay out preference dividend that year, they are still
required to accrue for it. However, for ordinary shares dividends, it will be optional for companies to
pay out.

Ordinary shares are more common than preference shares.