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Investment in share capital
Dividend policy
shareholder remedies
Corporate GovernanceDirectors duties
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Characteristics of a Company
upon incorporation, a company:
Has separate legal personality
has perpetual succession
has power to hold property
is capable of suing and being sued is capable of exercising all the functions of an incorporated
company (this includes the power to issueshares/debentures)
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Lifting the Corporate Veil
The law may ignore the separate legal personality of acompany and look to members or controllers for liability
By statute,eg:
- officers liable for co. debts where no reasonable
expectation of debts being paid - where business carried on with intent to defraud creditors,
individual personally liable
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Classification of Companies
Companies are classified according to:
the liability of members
Proprietary and Public
Holding and subsidiary Co
Recognised foreign companies
Trustee Co
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Classification of Companies
Co.s own liability is never limited, however members
liability arises on companys liquidation
the liability of members:
Limited by shares ( liability limited to amount of $ unpaid onthe shares) P/P (Ltd)
Limited by guarantee ( liability limited to amount of $members agree to pay on winding up) Public
Unlimited co ( no limit on members liability) P/P
No liability Co( mining Co- NL) Public
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Classification of Companies
Proprietary and Public
Public-1. all companies not proprietary2. at least 3 directors / AGM/ auditors3. Listed or unlisted
4. greater statutory duties than proprietary companies
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Classification of Companies
Proprietary and PublicProp- s.113
1. limited by shares (Pty Ltd) up to 50 shareholders2. must not engage in Ch 6D activities3. S.45A distinguishes between small and large prop co4. small Pty: gross Y less than $10m, assets
less than $5m, max 50 employees
6. Public and large pty must have financialreports and auditing, and sent to members and ASIC
7. All prop restrict right to transfer shares8. prohibit any invitation to the public to subscribe for any
shares in or debentures of the company or to depositmoney with it
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Classification of Companies
holding, subsidiary,groups of companies and relatedcompanies:
Note :holding Co* not defined in Act but subsidiary definedin s.46
A Co is a subsidiary if another co:
Controls composition of Board of Directorscontrols more than half the votes at general meeting
holds more than half the shares in subsidiary
Recognised foreign companies:
Must be registered with ASIC s.601CD
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Company Constitution
Constitution ( or replacement rules)( 140(1))
defines the objects and powers of the company
regulates the operations and internal management of thecompany
document must be lodged with ASIC
is a contract between the Co and each member between members
between members and Co Director/Co Secretary
Note: memorandum and articles
Note: Ultra Vires- under this doctrine any acts by the Cooutside its Constitution was void- rule abolished by S.124
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Co.s Constitution(s 140(1))
sets out
(a) the name of the co.
(b) the objects of the co.
(c) a share capital clause
(d) a liability clause(e) a subscriber clause:
are ap ta
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are ap ta
Share the interest of a shareholder in the company
measured by a sum of money, for the purpose of liability inthe first place, and of interest in the second, consisting alsoof a series of mutual covenants entered into by all theshareholders
Company raises the initial capital or further capital(investment) by way of an issue of shares
Shares shall be a moveable property, thus indicating that ashareholder may do what he likes with them; sell them,give them away or pledge them as security or a loan.
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Share Capital
Authorised capital -the amount of authorised capitalwhich the company intends to register and must be statedin constitution-comprises par value shares that have been/will be allotted.** This requirement is no longer necessaryafter 1998 amendments(254C)
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Types of shares 1) ordinary shares ( any share that is not a preference
share). Rights attaching to these shares are a) toparticipate in the surplus profits of the co through dividenddistribution b) return of capital in the event of winding upcompany c) full voting rights at general meetings (usually)
2)Preference shares- two types a) non voting preference
shares b) preference shares with voting and participationrights*
Preference shares usually entitle the holder to a fixed andcumulative dividend which is payable out of profits in
priority over dividends on ordinary shares and to a returnof capital.
f
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Preference shares text:7.20.50
Preference shares are issued as a source of flexiblecapital, the holder may not have right to vote, or participatebeyond specified amounts in any distribution or winding up
Cumulative/non cumulative preference shares- cumulativepreference shares: fixed rate of dividend through out thelife of the company. Non cumulative preference shares:
fixed rate only in those years where profits enable adividend to be paid.Redeemable preference shares:a) shareholder has the right
to be repaid capital contributions at a specified rate orcompany can repay at specified time.** reduction of capital,
insolvent tradingOther types of shares: a) non voting or restricted votingshares and employees shares
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Dividend Policy
Matter for the Directors only
Must be paid out of profit, s 254T( not capital) as the capitaof the company must be maintained to protect creditors
Before a dividend can be paid it must be declared, s 254U
In public company, recommended but declared at the AGM
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Fundraising/capital raising-
the procedure that occurs when a public companyissues shares, debentures, legal and equitable interestsand options.(s.9 , 761a & 700(4))
Applicable law ch 6D
Most fundraising involves shares rather than
debentures as there is a more complex procedure forissuing debentures, not only are disclosure docsrequired but a trust structure must be established tohold the security
Sale of existing shares generally not subject to Ch 6D
F d i i d I t P t ti
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Fundraising and InvestorProtection Disclosure documents - information that must be
supplied/ disclosed when fundraising
Disclosure documents include a) prospectus, b) shortform prospectus, c) profile statement, d) offer informationstatement.
The general rule is that there should be disclosure of allinformation that Investors and their professional advisorsneed to make an informed decision. s.710
Major issue: forecasting
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Investor Protection
Disclosure docs not required:
Excluded investment, s 708: 12 mths/20 Investors(personal offering)
raising max of $2m rule ( small scale);
$500,000 minimum investment or $2.5m net assets andgross income over $250,000; (sophisticated investors)
or through a licensed dealer to professional investors orexecutive officers of company.
Misrepresentations and Omissions Pt 6D 3
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Misrepresentations and Omissions-Pt 6D.3 Stop orders s.728- persons prohibited from offering
securities after finding out that the disclosure doc is
incorrect through fact or omission or where new informationhas arisen that is adverse to investors. ASIC may issue aStop Order on the disclosure document in thesecircumstances.
Supplementary material or replacement documents may be
lodged to correct deficiencies in original disclosures. S.719 Contravention of s.728 is a criminal offence and s.729provides for compensation if loss is suffered..
The TPA ( S.52) cannot be used to commence an action inrelation to disclosure docs.
Liability offences
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Liability-offences
S.726- offering securities in a non existent body S.727- offering securities without current disclosure doc
S. 728(1)- misleading and deceptive statements,omissions, new matters..
S. 728(2)- (1) is breached if there are no reasonablegrounds for making that statement.
If S. 728(1) contravened then s.729 provides forcompensation S.729(1) claimants must prove damage results from the
deceptive or misleading statement and s.729 sets a list ofwho may be liable- incl offeror, directors of body making
offer, persons named in the document with their consent asproposed director, underwriters, persons named in thedocument who with their consent have made statementsincluded in the document
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Corporate Governance
The term corporate governance refers to structures
and procedures within a company that ensureappropriate standards of corporate behaviour andaccountability-
the emphasis is on self regulation
corp. governance has the purpose of monitoringand controlling the management of corp so as toprovide more effective management and to improveshareholder value
the emphasis on corp gov reflects the investorsdemands that corp improve their internal structureswhich ultimately may improve investor returns.
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Corporate Governance & Directors duties corporate governance is a relatively new term and is based
primarily, but not only on Directors and company officersduties.
Duties are categorised as
1) statutory duties (ss 180,181,182,183,191)
2)Fiduciary & common law duties3)ASX Listing rules,
4)Codes
There is substantial overlap between these categories of
duties. t
t t t d ti
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statutory duties
S.180- directors and officers have a duty to exercise areasonable degree of care and diligence- defence 'business judgement rule
S.181-duty to act in good faith in the best interests of theCo and for a proper purpose
S.182-improper use of position
S.183- improper use of information that is gained in theirposition within Co
Ch 2E related party transactions
S.191 directors who have material self interest in a matterbefore the board must disclose this to other directors
Material self interest- s.195
Fiduciary duties
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Fiduciary duties
The word fiduciary refers to a person holding a position
of trust such that he/she is bound in equity not to abusethe trust.
Fiduciary duties require the Director to act bona fide inthe best interest of the company as a whole.. Fiduciary
duties are imposed individually not on the Boardcollectively.
It doesnt matter how wide or extensive the powers given
to the directors in the Co constitution ,the fiduciary powers
remain the same
Fid i d ti
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Fiduciary dutiesThe fiduciary powers are:
1) To act bona fide in the best interests of the company.This duty is also found in legislation
a director shall at all times act honestly and use
reasonable diligence in the discharge of his duties
legislation also provides that an officer shall not make improper use of information gained in his position. The
words honestly and bona fide are interpreted as meaning
what the directors consider is in the best interest of the
company., not necessarily what others or the courtconsiders was in the companys best interests.
Fiduciary duties cont
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Fiduciary duties cont.,
2)Duty to exercise powers for a proper purpose. The courtlooks to the primary or substantial cause of the exerciseof power- if impermissible then the courts will declare theaction void.
3) duty to avoid a conflict of interesta) a director must not use the property or money of thecompany to make a profit for himself
b) director cannot use information gained in his position as
director to make a profit for himself
c) Director cannot make use of his position to obtainprofits for himself or to retain such profits
common law duties
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common law duties
1) duty to use skill in the performance of duties-
2) duty of care: 3) Duty to be diligent A director must exercise
reasonable diligence in the performance of his duties.
REMEDIES for breach : directors may be sued for
damages, profits made by directors may have to behanded to the company.
ASX Listing rules http://www.australian-corporate-
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g p pgovernance.com.au
ASX Corporate Governance Council has set out 10 essentialprinciples with best practice recommendations on how these should
be implementedhttp://www.asx.com.au/supervision/governance
1. lay solid foundations for management and oversight
2. Structure the board to add value
3. promote ethical and responsible decision making4. safeguard integrity in financial reporting
5. Make timely and balanced disclosure
6.Respect the rights of shareholders
7. recognise and manage risk
8. encourage enhanced performance
9. Remunerate fairly and responsibly
10. recognise the legitimate interests of stakeholders
ASX Listing rules
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ASX Listing rules
ASX listing rule 4.10.3 requires listed companies to disclose
in their annual reports the extent to which they havefollowed these 10 principles
Minority shareholders
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Minority shareholders
Shareholders vote for the Directors,
.alteration of the Constitution share capital and variation of rights
of shareholders,
however these matters may lead to minorityshareholder oppression
Investor Remedies
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Investor Remedies
Minority shareholders provided with some protection underthe Co Act..
s 232 oppressive or unfair conduct s 233 Remedies including, winding up of company(s461) Right to inspect the company books, s 247A Injunction, s 1324
Derivative action (investor brings action on behalf of thecompany) s 236 and s 237
Read :Gambottos case