Q.1. Before providing assessment of the case, whether or not there is a ground for legal action, the main problem has to be determined first to be able to construct a sound judgement. The main issue is that Cotton Limited, which happens to hold 89.5% of Satin Co. Limited's shares is pushing the minority shareholders including Silk to sell their own shares to Cotton Limited. The decision to buy-back the minority shares was made by Satin's board members themselves. Therefore, the idea of making the company a wholly owned subsidiary constitutes validity because the agreement was made by the majority of the board members. However, Silk and the rest of the minority shareholders are against the idea of selling their shares over to Cotton Limited. Since the minority shareholders cannot convince Silk and other small shareholders to sell their shares, arrangements were made to hold a meeting to pass a resolution instead to insert a new clause in the company constitution. The resolution states any board member holding 80% or more of the company shares can act to compulsorily acquire the rest of the minority shares. Silk and other shareholders received their notice of the meeting, but they are still against selling their own shares. Silk, being a member of the minority shareholder is also not happy with the proposed changes to the constitution. As a counter measure, Silk and the others are seeking legal action to stop the proposed change in the constitution and from their shares from being compulsorily taken from them.
Assessing whether, Silk's plan for legal action will constitute success or not, specific elements and perspectives has to be considered in order to establish legal grounds. There are two ways on how to look at the issue, from the majority shareholder's perspectives and from the minority shareholders point-of-view (Hanson, 2010, Web). First, the position of majority shareholders in compelling the minority shareholders to sell their shares. In the given scenario, the board members feel that the company can benefit from moving out the minority shareholders in terms of tax and saving $230,000 on administrative and accounting costs. Secondly, the minority shareholders point-of-view, which most of the time dominated by the feeling of being pressured and underrated. Normally, a shareholder has legal rights not to be compelled into selling their shares of stock. The Corporations Act of 2001 defined the shareholder's rights and it clearly stipulates that shareholders regardless of the size of the share has the right to keep their shares and in no given circumstances that they are to be forced into selling their shares (Mark Sallis and Crawford Legal, 2004). However, the size of the minority shareholder's share determines his power to vote during board resolutions, but he still has the right to exercise his rights whenever he see fit.
Major shareholders may sometimes come up with illegal and unethical approach in dealing with the problem such as described in the scenario between Cotton Limited and Silk. If the majority shareholders were not able to convince the minority shareholders to sell their shares, they sometimes resort to strategies that will impair the company. One is to move away the business from the minority. Others may transfer the company assets to another business in the same industry. Lastly, take away customers of the business and move them to the newly established business. This way the company where the minority shares were invested will suffer in loses and decrease revenue. When that happens the minority shares would eventually lose money in the business and that would make the minority shareholders to sell them them to the majority stakeholders. In the case of Cotton Limited and Silk, the strategy is to change the constitution by adding another clause stipulating the compulsory acquisition of the minority shares. Silk knows that when the resolution was taken into effect, she would not have any choice, but to sell her shares anyway.
According to Section 232 of Corporations Act or otherwise known as the Oppressive Conduct clause, once the court found that the company's directors and majority stakeholders are acting in an oppressive manner, including compelling and unfairly prejudicial to the minority shareholders. Any resolution and decision passed by the board of directors will be deemed invalid. Therefore, Silk has to provide sufficient justification to the court that the reason that the board of directors are changing the resolution is to force the minority shareholders to let go of their shares to the majority. Once the grounds for resolution has been substantiated in the court, the resolution of the board will be void and there is a possibility that Cotton will ordered by the court to pay compensation to the company. However, it was mentioned earlier that the company has plans for the company and part of which is to buy-back the minority shares. On such grounds the resolution to change the constitution would appear to be valid. Therefore, Silk has to make sure that she was able to justify in court that the primary reason that Cotton is buying up minority shares is because Cotton want to own the entire company, which constitutes elements of self interest.
If Silk would be able to show evidence that Cotton Limited and the directors are acting in favor of gaining for self advantage it will attract section 232 with references to Director's Duties clause stated in sections 181 and 182 or the Director's Fiduciary Duty definitions (Mark Sallis and Crawford Legal, 2004). It Silk would be able to do that, she could anticipate victory once she took the case to court. If the case is that Silk is using her connection to Satin Co. Limited to gain information from the company and apply the proprietary information to another company in competition with Satin Co. Limited. The circumstances would be different and Silk would come out as the violator of the sections described in Corporations Act. Any legal actions that she might pursue to stop the board resolution would not favored by the court.
Q.2. Board meetings are mandatory in all companies because this is when the directors and other stakeholders meet to discuss the progress of the business and tackle reports and future projections. This is also the time when resolutions have to be decided using a voting process, which is legally the proper way of making decisions that will influence the business in the long run. In cases when a company holds a meeting, certain rules and requirements have to be considered. However, some areas ofthe Corporations Act allow business to hold meetings and stand notwithstanding that the meeting was able to strictly complied with all the legal requirements of the Act. According to the rules scheduling a meeting should always justify purpose and in this case Cotton Limited has called out to the majority shareholders to insert a clause to the constitution. Such purpose meant changing the company's constitution and changing constitutions require statutory compliance and meet the applicable requirements.
Before holding a meeting, the rule stipulates that a notice of the meeting should be sent out to the directors, shareholders, executives and other people that perform major capacity in the company. The rule also indicated that the notice should count at least 21 days before the scheduled meeting. For Satin Co. Limited, the meeting to pass a resolution is classified as a special meeting. Therefore, it is crucial that the company was able to comply with the requirements of the Corporations Act regarding meetings. If in case the court found that the meeting was held without adhering to the guidelines, any sort of resolution passed during the meeting be null and void. If the objective of the meeting is to pass resolution to change constitution, then it should be a general because department and administrative meetings are not allowed by the law to pass any resolutions that will alter the course of the company's nature of business. In terms of giving notice of the meeting, the notice should clearly indicate the purpose and state clear objectives.
For special resolutions such as to change or insert clauses in the constitution, the general meeting should meet at least 75% of the total attendance of all concerned individuals in the company, particularly the board members. In case a board member would not be able to attend the meeting, a proxy form has to be accomplished to indicate the person that will represent the absent director in the meeting. Proxies are given power to vote on behalf of the absent director and no other person in the meeting has the right to object and discount the votes coming from a proxy. After resolutions have been passed, it would not take effect immediately because resolutions have to be lodged into the books of Registrar of Incorporated Associations or the Registrar of Co-Operatives. Not following this rule will also void the resolution's validity and the resolution will not be ordered to take effect. The minutes of the meeting and copy of the resolution should also be submitted to the Consumer Affairs Victoria within 28 days after the meeting. All companies should adhere to these requirements, ING, Tassal Group and Wesfarmers are examples of companies that passed resolution to change their constitution. However, the common purpose for this company to do so is not to oppress the minority shareholders, but to oblige their shareholders to vote directly during meetings.
Q.3. Polyester is a director, knowing her position in the company she has the obligation to follow the ethical standards of a corporate leader and adhere to the values that Corporations Act have set for company directors in pursuant to Corporations Act Section 181 and 182. It stated that the director's fiduciary duties is to exercise their powers in good faith at all times, including making decision for the right purpose. All decisions have to be in line with the company's best commercial interest and should not in any way geared towards personal interest. Taking advantage of anyone and the company is also a violation of the law as mandated by the clauses defined as the "judgement rule".
Situation 1 – If Polyester have used the company's money for personal reasons, she has violated the provisions of the judgement rule of Corporations Act on sections 180 (judgement rule) 181 and 182. It was mentioned earlier not directors are in any circumstances not allowed to take advantage of their position in the company to compensate own self by means of taking monetary assets from the company. It is apparent that being a shareholder means Polyester is part owner of the company, but it does not give her the right to touch any of the company's assets particularly money without the other director's approval. Besides, the $65,000 amount that she took is also owned by the other shareholders. Her action constitutes civil liability and classified as an act of embezzlement from the company, which is an offense punishable by law. Polyester's act of embezzlement will have a negative implication to the company because the money she took would be considered a company loss. In general, anything that are owned and declared in the company assets and liabilities including cash, fixed assets and stocks are company owned and are subject to the rules mandated by the company's constitution.
Situation 2 – It is inevitable that companies are vulnerable to financial difficulties regardless of size. However, being a director it is not ethical and a violation of Section 200C, 181, 182 and 180 of the Corporations Act to transfer company assets to another company of the same nature of business. Directly transferring assets from one company to another is prohibited by law, otherwise the company could only sell outstanding stock in order to fulfill any financial requirement. Even selling stocks are subject to the rule of the company's constitution and should be initiated by board voting. In Polyester's case, she made a decision that was not clearly stating whether or not it was approved by the board majority. Regardless of Polyester's predicaments for transferring the company assets to another business is deemed unethical and may constitute intentions that might attract section 232 of the Corporations act. That is the act of oppressive conduct because moving assets from the company demonstrate's intention to move business away from minority shareholders. Taking away the company's assets especially during financial difficulties would not help, but instead would only further injure the company. The best solution for a company is financial trouble is to sell assets in a form of stocks and not to transfer. Transferring assets towards another business particularly if the third party is also engaged in the same industry would only create competition among the businesses. Furthermore, if the company where the assets are being transferred to is also associated with Polyester, it demonstrates conflict of interest, which is again unethical for a director.
Situation 3 – This situation is also a direct violation of Section 180 of the Corporations Act in reference to judgement rule. Meaning directors, officers and everyone in capacity should at all times use their power with utmost diligence as part of their civil obligation. Polyester's decision to extend credit to one of the trade debtors should be subject to approval and her decisions should be based on the credit history of the trader. If there is an indication that the trader was at all times not able to payments to the company for the goods acquired from the company, the trade debtor should not be granted with credit opportunities by the company. What Polyester did is to extend the trader's credit to $5,000 more, although as a director she should be aware that the prescribed credit line is only $20,000. Polyester only showed that she is not capable of making wise decisions for the company and above all else in the company should know the implications of her wrong decisions. There could be an underlying reason for her to extend the trade debtor's credit line. It is possible that Polyester has a more personal relation to the trader, which explains her confidence for providing higher credit. But in the ethics of business, personal relations should not take part or in any way influence a director's judgement because decisions made by people in her position is crucial for the company's survival.
Mary Hanson, The Minority Shareholder: What a Shareholder can do (2010) The Business Advisor
Mark Sallis and Crawford Legal, Moving Out a Minority Shareholder (2004) Adam Gamble Publication