LAWS2014 – CORPORATIONS LAW
1. FORMING A COMPANY AND BUSINESS STRUCTURES 2
TYPES OF COMPANIES AND BUSINESS STRUCTURES 5
2. CORPORATE FUNDRAISING 10
METHOD OF RAISING MONEY 10
EQUITY AND DEBT FUNDRAISING 11
REGULATED FUNDRAISING UNDER CH 6D 13
UNREGULATED (EXEMPT) FUNDRAISING 24
OTHER PROHIBITED CONDUCT 27
3. CORPORATE PERSONALITY 29
CORPORATE GROUPS 33
EXCEPTION: PIERCING THE CORPORATE VEIL 35
INSOLVENCY LAW 41
4. CORPORATE CONSTITUTION AND DECISION-MAKING ORGANS 43
CORPORATE DECISION-MAKING ORGANS 52
OTHER DECISION MAKING METHODS 55
5. COMPANY MEETINGS 57
DIRECTOR’S MEETINGS 57
MEMBER’S MEETINGS 60
DIRECTORS 68
OFFICERS 72
6. CORPORATE ATTRIBUTION AND LIABILITY (TORT, CRIMINAL LAW, CONTRACT) 74
LIABILITY IN TORT 74
LIABILITY IN CRIMINAL LAW 76
LIABILITY IN CONTRACT 84
7. INTRODUCTION TO DIRECTORS DUTIES 95
DUTY TO ACT IN GOOD FAITH FOR THE BENEFIT OF THE COMPANY AND FOR
A PROPER PURPOSE 96
DUTY TO PREVENT A CONFLICT OF INTEREST 104
STATUTORY REGULATION OF CONFLICTS 115
DUTY TO DISCLOSE A MATERIAL PERSONAL INTEREST 118
RELATED PARTY TRANSACTIONS 122
9. DUTY OF CARE AND INSOLVENT TRADING 127
DUTY OF CARE 127
INSOLVENT TRADING (DIRECTORS ONLY) 141
10. MEMBER’S RIGHTS AND REMEDIES 145
2. CORPORATE FUNDRAISING
METHOD OF RAISING MONEY A. Internal sources of funding
- Revenue from trading activities (into retained earnings)
- Can be used to re-invest in the company through buying new assets or pay off debt - After paying debts – may pay shareholder dividends out of RE or buy back shares so
shareholders can realise gains on the value of their shares - Funds from asset sales
B. External sources of funding Debt
- Trade credit: (not really raising new money but deferring obligation to pay money for G/S its obtaining) i.e. deferred payment terms
- Loans from financial institutions: can be secured over company assets as collateral, or unsecured
- Loans from investment instruments: taking a fundraising target and splitting into individual investment securities to issue (bonds or debenture under Corp Act)
- Bondholders are creditors who have lent the company money which is represented by the value of the bond they hold
- Types of debentures prescribed under act: s 9
- Mortgage debenture – if debenture is secured by first mortgage over real property
- Debenture – secured over property - Unsecured note – If there is no security Equity
- Investment instruments of Shares: issued by the company as equity instruments (not from stock market as that is buying off existing shareholders being the ‘secondary market’)
- Ordinary shares or preference shares - Hybrid instruments across spectrum
- Carres characteristics of both debt and equity - Option over shares : to be issued in the future
- E.g. option… right to acquire a share in the company in the future or right to sell a share of the company in the future
- Owners of an option holder are ‘members’ of the company because they can acquire shares in the future
EQUITY AND DEBT FUNDRAISING
If a company is raising money through equity and debt securities e.g. issuing shares or selling debentures (bonds) then Ch 6D of the Corp Act applies.
Capital fundraising
- Companies need a capital base to fund their activities
- Companies raise money by selling investment instruments to investors Power to issue debt and equity capital:
s 124 Legal capacity and powers of a company
(1) A company has the legal capacity and powers of an individual and a body corporate including the power to (a) issue and cancel shares in the company; and (b) issue debentures Or issue bonus, partly-paid, preference and redeemable preference shares: s 254A
Capital structure (in order of payment priority) 1. Senior secured debt (lowest risk)
2. Secured debt 3. Subordinated debt 4. Unsecured debt 5. Preference shares
6. Ordinary shares (highest risk) A. DEBT
Characteristics of debt
a. Must be paid: it is a fixed claim-regardless or how profitable the company is
- Cf Equity as dividends are only paid if company has sufficient assets and profits to pay dividends: s254T
- s 516 says if you have a company limited by shares then if a shareholder does not need to contribute more than the amount (if any) unpaid on their shares but debt must be paid.
b. Priority payment:
- Debt must be paid back before equity claims (i.e. dividends): s 563A - Cf shareholders who are last in the capital structure
c. Does not confer voting rights
- But large sophisticated creditors do have some leverage over management d. Does not dilute equity
- Cf Equity where issuing more shares takes away from other shareholders and share price goes down (dilutes existing members unless they buy more
e. Interest on debt for business purposes may be tax deductible - Dividend payments are not tax deductible f. Interest on debt for business purposes may be tax deductible
- Cf Equity Dividend payments are not tax deductible g. Message of solvency
- Debt sends a message to the market that insiders believe the company’s future cash flows will be sufficient to discharge the debt obligations
- Cf Equity which may signal that they had no other choice Forms of debt capital raising
- Debentures = in Australian/British law are ‘debt securities’ (investment instruments) - May be secured or unsecured
- Bonds = usually secured by collateral, long-term interest-bearing securities (a US term not traditionally used in Corps Act)
- Since 2014-simple corporate bonds in Ch 6D
- Common for large companies to raise funds by issuing bonds in foreign currency - Notes = usually unsecured, promissory notes (ie. an IOU)
- i.e. you lent me this much I owe you this much
- Convertibles/hybrids = a debt instrument that can be converted into an equity instrument or an instrument that has characteristics of both debt and equity
- E.g. convertible: if you have an investor concerned about risk involved in taking equity you could fundraise so it stars as debt investor (high priority ranking) but then later an option to convert it into equity, we will now issue you shares to get benefit of equity upside which is usually more than face value of debt
- E.g. Hybrid: debentures with share warrants or options B. EQUITY
Characteristics of Shares
- ‘A share is…a fractional part of the capital. It confers upon the holder a certain right to a proportionate part of the assets of the corporation, whether by way of dividend or of distribution of assets in winding up. It forms, however, a separate right of property. The capital is the property of the corporation. The share, although it is a fraction of the capital, is the property of the corporator. The aggregate of all the fractions if collected in two or three hands does not constitute the corporators, the owners of the capital — that remains the property of the corporation. But, nevertheless, the share is a property in a fractional part of the capital.’ Bradbury v English Sewing Cotton Co Ltd [1923] AC 744 at 767 per Lord Wrenbury
- Ordinary shares: default if only one class of shares and contain 1 vote per share - Preference shares: class of share issued with special rights that the other class does
not have e.g. can have more or less voting rights or dividends than ordinary shares - May have redeemable preference shares which convert into ordinary shares or
can be bought back
a. Right to vote at members’ meeting
- E.g. right to vote for or against directors i.e. control over board b. Right to receive information (eg annual reports)
- E.g. annual reports, info about meetings, option to buy more shares ‘rights issues’ right to participate in new fundraising (often discounted shares to just already shareholders)
- Can be redeemable effectively bought back by company or converted to ordinary shares
c. Right to receive a dividend (if one declared/determined)
d. Right to use members’ remedies (such as minority oppression) e. A share is personal property:
- it is a form of investment that confers proprietary rights on the investor’ Gambotto v WCP Ltd (1995) 185 CLR 432
- s1070A now if you contribute $1000 worth of shares doesn't mean you have $1000 of companies assets, you have rights against company not rights to assets of company, the share is the property, it is the right
f. Added compliance
- Compliance with listing rules and limit on how many shares can be listed g. Dividends paid at board's discretion
- Dividends are within board’s discretion (s254U); co must have sufficient funds (s254T)
h. Primary market (IPO) v secondary market
REGULATED FUNDRAISING UNDER CH 6D
Regulated fundraising (fundraising using a ‘disclosure document’ lodged with ASIC) Unregulated fundraising (fundraising that does not use a lodged ‘disclosure document’)
- Unregulated fundraisings will use an information memorandum
- Fundraising that is exempt under s708 and doesn’t use a ‘disclosure document’
Raising money by issuing securities under Ch 6D
1. Does the issue (fundraising activity) involve securities? Such that Ch 6D applies - Does the issue of the instrument involve securities? Debt or equity?
2. Do we need a disclosure document to be lodged? Prospectus
- General prohibition on making an offer for securities unless accompanied by disclosure document: 706
- Unless exemptions apply: s 708 and 708AA 3. Has a prospectus been prepared and lodged?
4. Is there a problem with the content of the prospectus?
- s 728 and s 729
- S 728 tells us when it has been misleading and s 729 for who can get sued s 706 Issue offers that need disclosure
An offer of securities for issue, other than a CSF offer, needs disclosure to investors under
this part unless s 708 or 708AA state otherwise
1. Does the fundraising activity involve an offer to issue securities?
a. ‘Offer’ or ‘invitation’ as defined in s 700(2)(a) Corporations Act
- Definition: Offering securities for issue includes “inviting applications for the issue of securities”
b. Does the offer or invitation deal with ‘securities’ as defined in s 700(1) Corporations Act?
A company issuing shares and debentures is issuing securities
- Reiterated in s 92 definition of securities which stats that securities in Ch 6D has the meaning given by s 700, and in Ch 7 security has the meaning given by s 761A - Securities in Ch 6D is given the same meaning as Ch 7: s 700(1)
- Ch 7 securities are given the meaning by s 761A
- s 761A defines securities as… (except e. and f. which are excluded by s 700)
- (a) shares, (b) debentures, (c) a legal or equitable rights in shares or debentures, (d) an option to acquire, by way of issue, a share or debenture, (g) a simple corporate bond depository interest
Power to issue debt and equity capital
s 124 Legal capacity and powers of a company
(1) A company has the legal capacity and powers of an individual and body corporate, including the power to (a) issue and cancel shares in the company; and (b) issue debentures Or issue bonus, partly-paid, preference and redeemable preference shares: s 254A
c. does offer relate to a primary offering (issue) or secondary trading (sale)?
- s 706 applies to the ‘an offer of securities for issue’ so the shares must relate to a primary offering.
- s 700 separate ‘offering securities for issue’ i.e. inviting applications vs ‘offering securities for sale’ i.e. inviting offers to purchase
- Certain secondary sales will require disclosure, e.g. the person making the offer controls the body and securities not listed on ASX: s 707(2)
d. Is the company issuing DEBT?
Is the form of debt issued a debenture?
- s 9 definition of debenture: ‘debenture of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money’
- Bonds = chose in action = right of lender to enforce repayment of debt and company is undertaking to repay the money lent to it.
- Does not include:
a. an undertaking to repay money deposited with or lent to the body by a person if:
- (i) the person deposits or lends the money in the ordinary course of a business carried on by the person; AND e.g. CBA
- (ii) the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance; or e.g. company uses money to make goods
- I.e bank loan ≠ debenture, rationale being banks don't need same protection from Corp Act as a retail bond holder
b. an undertaking by an Australian ADI (authorised deposit taking institution) to repay money deposited with it, or lent to it, in the ordinary course of its banking business; or c. an undertaking to pay money under:
- (i) a cheque ; or
- (ii) an order for the payment of money; or - (iii) a bill of exchange ; or
e. an undertaking by a body corporate to pay money to a related body corporate; or f. an undertaking to repay money that is prescribed by the regulations.
- Certain trade credit (s9(a)) - Bank deposit (s9(b))
- Undertakings to pay under negotiable instruments (s9(c)) Undertakings by a body corporate to pay money to a related body corporate (s9(e))
If it meets the definition of debenture, then Ch 6D obligations need to be examined, if it does not, the issuing of debt is unlikely to involve securities
Note: Debentures may be sold to retail investors (regular people) or wholesale investors. Ch 6D applies but Ch 2L can also apply if the debentures are sold to retail investors in the general market. Ch 2L contains lots of requirements like setting up a debenture trust, appointing debenture trustee etc.
e. Is the company issuing EQUITY?
1. Is the company issuing shares?
a. Ordinary shares b. Preference shares
2. Limited to public companies generally
- Because proprietary companies must have no more than 50 non-employee shareholders: s 113(1)
3. Is it a new issue of shares (not purchased from the secondary market)?
- Indicated by an IPO (initial public offering of new securities which aren’t listed)
2. Does a disclosure document need to be lodged? Or does an EXEMPTION in s 708 apply such that it is an UNREGULATED (exempt) issue
Onus = on the company issuing securities to prove an exception applies: ASIC v Maxwell To reiterate,
s 706 Issue offers that need disclosure
An offer of securities for issue, other than a CSF offer, needs disclosure to investors under this part unless s 708 or 708AA state otherwise
s 704 When disclosure to investors is needed
ss 706, 707, 708, 708AA, 708A say when an offer of securities , other than a CSF offer, needs disclosure to investors under this part
Exempt issue offers that do not require a disclosure document
a. Small scale offerings (20 issues or sales in 12 months)
s 708 Offers that do not need disclosure (2) A personal offer is one that:
a. may only be accepted by the person to whom it is made ; and
b. is made to a person who is likely to be interested in the offer, having regard to:
- (i) previous contact between the person making the offer and that person; or
- (ii) some professional or other connection between the person making the offer and that person; or
- (iii) statements or actions by that person that indicate that they are interested in offers of that kind.
(1) Personal offers of a body’s securities do not need disclosure if none of the offers results in a breach of the
a. 20 investors ceiling (see (3) and (4)) OR b. $2 million ceiling (see (3) and (4)).
(3) For an offer by a body to issue securities:
a. 20 investor ceiling is breached if the offer results in securities being issued to more than 20 people in any 12-month period offers accepted not offers made
b. $2m ceiling is breached if the offer results in more than $2m being raised in any 12-month period
See (4) For an offer by a person to transfer a body’s securities
(5) In counting how many securities are issued and the amount raised, disregard issues and sales that result from offers that:
a. do not need a disclosure document because of any other subsection of this section; or b. are not received in Australia ; or
c. are made under a disclosure document .
Breaching the $20m and 20 investor ceilings is an automatic contravention of CPP.
s 727 Offering securities without a current disclosure document
(4) If a person relies on s 708(1) to make offers of securities without disclosure, the person must not issue securities without disclosure to investors if the issue would result in a breach of the 20 investors ceiling or the $2 million ceiling
(6) Contravention of (4) results in a branch of s 727 which is a civil penalty provision.
b. Sophisticated investors
(8) An offer of a body’s securities does not need disclosure if:
a. the minimum amount payable for the securities by the person to whom the offer is made is at least $500,000 ; OR
b. Is at least $500,000 taking into account amounts previously paid by the person for the body’s securities of the same class; OR
c. it appears from a certificate given by a qualified accountant no more than 6 months before the offer is made that the person to whom the offer is made:
- (i) has net assets of at least $2.5 million (reg 6D 2.03); OR
- (ii) has a gross income for each of the last 2 financial years of $250,000 (reg 6D 2.03); OR
d. the offer is made to a company or trust controlled by a person who meets the requirements of subparagraph (c)(i) or (ii)
(9) Amount payable does not include money that was lent by the person offering the securities (10) An offer of a body’s securities does not need disclosure to investors under this Part if:
a. the offer is made through a financial services licensee ; and
b. the licensee is satisfied on reasonable grounds that the person to whom the offer is made has previous experience in investing in securities that allows them to assess:
- (i) the merits of the offer; and - (ii) the value of the securities; and
- (iii) the risks involved in accepting the offer; and - (iv) their own information needs ; and
- (v) the adequacy of the information given by the person making the offer; and
c. the licensee gives the person before, or at the time when, the offer is made a written statement of the licensee’s reasons for being satisfied as to those matters; and
- Note the statement addresses investors experience not particulars of offer d. the person to whom the offer is made signs a written acknowledgment before, or at
the time when, the offer is made that no disclosure document was given.
- In ASIC v Maxwell : (accountant failed to personally check investors) held the licensee’s satisfaction on reasonable grounds requires the licensee to significantly investigate the experience of the investor to form the relevant opinion
- In ASIC v Elm Financial Services Pty Ltd : held that this inquiry in 10(b) must be approached diligently and carefully , it's a statutory duty to make an inquiry about all matters relevant ‘most cursory attention to the statutory criteria’
ASIC v Maxwell [2006] NSWSC 1052
- A group of companies were involved in property development projects throughout NSW.
- They raised debentures to the public to fund this. The investments, which were advertised in suburban newspapers, promised returns of approximately 30% p.a.
- Mr Coakley was retained to act as a financial service licensee to enable the companies to obtain a s 708(10) exemption (‘sophisticated investor’).
- ASIC argued Mr Coakley had not investigated their financial circumstances or their previous experience in investing (at [206]).
- Held: illegal fundraising as a prospectus was needed
- On the facts: the financial service licensee had not even met most of the investors , he did not personally viewed records to see if they met the 708(10)(b) criteria, he simply send out a document asking the investors if they met each criteria. Despite this he wrote a written statement of reasons for each of the investors to satisfy the requirement in s 708(10).
- Should’ve lodged a disclosure document under s 727(1) so breach of CPP - Disqualification rules in 206C applies specifically to s 727(6) under s 206C(1)(i) - Banned from being company directors
c. Professional Investors
(11) An offer of securities does not need disclosure to investors if it is made to:
a. a professional investor covered by the definition in s 9 (except para (e)); OR b. a person who has or controls gross (not net) assets of at least $10 million
(including any assets held by an associate or under a trust that the person manages) Control is via majority shareholding in a company and consummate voting rights: MIS Funding v Buckley
s 9 Dictionary – definition of professional investor is any of the following…
a. A person is a financial services licensee
b. A person is regulated by APRA, other than a trustee of a superannuation fund, approved deposit fund, pooled superannuation trust, public sector superannuation scheme
c. Person is a registered entity under Financial Sector (Collection of Data) Act 2001 d. Person is a trustee of superannuation fund, scheme, or trust, or approved deposit fund
AND has net assets of at least $10m
f. Person is a listed entity, or related body corporate of a listed entity g. Person is an exempt public authority
h. Person is a body corporate, or unincorporated body, that carries on a business of investment in financial products , interests in land or other investments
d. Offers to associated parties
(12) An offer of a body’s securities does not need disclosure if it is made to:
a. a senior manager of the body or a related body or their family – spouse, parent, child, brother or sister; or
b. a body corporate controlled by any of those individuals in (a)
s 9 Dictionary – definition of senior manager of a corporation is a person (other than a director or secretary of the corporation) who makes, or participants in making, decisions that affect the whole, or a substantial part, of the business OR has the capacity to affecting significantly the corporations financial standing
ASIC Corporations (Disclosure Relief—Offers to Associates) Instrument 2017/737 expressly corrects 708(12) to say senior managers includes directors now
e. Offers to present holders of securities
- E.g. Dividend of 40c per share, company can take that money and give the equivalent in shares so you increase your shares in the company. This is not the same as a company selling securities to its owns shareholders
(13) An offer of securities for issue does not need disclosure if:
a. an offer of fully-paid SHARES in a body to 1 or more existing holders of shares in the body under a dividend reinvestment plan or bonus share plan ; OR
b. an offer of INTERESTS in a managed investment scheme to 1 or more existing holders of interests in the scheme if:
- (i) the offer is made under a distribution reinvestment plan or switching facility; or - (ii) the scheme is of a kind commonly known as a cash common fund or cash
management trust.
(14) An offer of a disclosing entity’s DEBENTURES for issue does not need disclosure to investors under this Part if the offer is made to 1 or more existing debenture holders.
f. Offers for no consideration
- An offer of securities (other than options) does not need disclosure if no consideration is to be provided for the issue or transfer of the securities: s 708(15)
- An offer of options does not need disclosure if no consideration is to be provided for the issue or transfer of the options AND the underlying securities on the exercise of the option; s 708(16)
g. Compromise or arrangement under Part 5.1
(17) An offer of securities does not need disclosure to investors under this Part if it is made under a compromise or arrangement under Part 5.1 approved at a meeting held as a result of an order under subsection 411(1) or (1A).
h. Deed of company arrangement
(17A) An offer of securities does not need disclosure to investors under this Part if:
a. it is made to any or all of the company's creditors under a deed of company arrangement ; AND
b. it does not require the provision of consideration other than the release of the company from a debt or debts; AND
c. before the offer was specified in the deed, the administrator gave as many creditors as reasonably practicable a statement:
- (i) that set out all relevant information about the offer that was within the knowledge of the administrator of the deed; AND
- (ii) that stated that the statement is not a prospectus and may contain less information than a prospectus.
i. Takeovers
(18) An offer of securities does not need disclosure to investors under this Part if it is:
a. made as consideration for an offer to acquire securities under a takeover bid under Chapter 6; AND
b. accompanied by a bidder's statement.
- Note: Although this offer does not need a disclosure document, similar disclosures must be made about the securities in the bidder's statement under section 636.
j. Debentures of certain bodies
(19) An offer of a body's debentures for issue or sale does not need disclosure if the body is:
a. an Australian ADI ; OR
b. registered under section 21 of the Life Insurance Act 1995 .
- ‘Debenture’ is given a broad meaning in s 9, and banks frequently accept money on
