Company Law Lecture -Topic

4
Chp 6 p 168, Chp 7 p181-
203, Chp 8 p 208- 243
Promoters, Share Offerings,
Classes of Shares
 Liability of Promoters
Active Promoters are individuals who
undertake the initiation and formation of a
new company by taking the necessary steps
towards registration, raising capital and
issuing a prospectus.
A Passive Promoter is a person who takes
no active role in registration.
Fiduciary duties apply to all promoters so
that they do not abuse their position.
 Sole traders often become
Promoters
A common occurrence in the formation of
companies is the situation where a person
forms a small proprietary company to purchase
a business previously run by a sole trader. The
person forms a company with the objective of
then selling particular property previously
owned by the sole trader business to the
company to gain the benefits of a limited
liability company. This kind of promoter has
fiduciary duties.
 The Fiduciary Duties of a
promoter.
The same Fiduciary duties that apply
automatically to a promoter also apply to
directors. If a promoter becomes a director
the same duties will overlap and still apply:-
A promoter must disclose any personal
interest or conflict if interest.
A promoter must disclose any personal
profits. And must set out their interests in the
company formation in the Prospectus.
 The old Common law did not
protect outsiders
Under the old common law of agency a
promoter could not enter into a binding
contract on behalf of a company because until
the company is registered it does not exist as
a legal entity, therefore: -
A company couldnt ratify such a contract.
The individual acting as a promoter couldnt
be personally liable for any contracts.
The common law didnt protect outsiders.
 Statutory reforms to assist with
pre-registration contracts
Sec 131(1), (s 133) overcome the lack of
protection in the common law for outsiders in
contracts with promoters: - where a person
purports to enter into a contract on behalf of a
company before it is registered then the
company will be bound if it ratifies the contract
as agreed, or within a reasonable time after
registration.
Sec 131(2) makes the person personally liable if
registration or ratification fails.
 Remedies for breach of
Promoters Duties
The fiduciary duty is owed by the promoter to the
company and therefore the company may ask for
the rescission of any contract. If the
misrepresentation is fraudulent then it may claim
damages.
Under s 131(2) the promoter will be liable to pay
damages to the outsider if the company fails to be
registered or to ratify.
A promoter may be liable to a liquidator for
damages or recovery of loss.
 Share Offerings Fundraising
Provisions ( Chp 7 )
A person buys shares according to the principles
of contract law and is known as a shareholder
and member.
Public Companies engage in public fundraising
by selling their shares to public investors
through the stock market in order to raise capital
to fund the business activities of the company.
There are strict laws that regulate public
fundraising ie. Corporations Act s 700-741
The purpose of the fund raising
provisions ( s 700 741)
The aim of the fund raising provisions is to
protect the investor by ensuring that they can be
provided with accurate, reliable and relevant
information so that they can make an informed
decision.
The protection of the investor however must
strike a reasonable balance with the need for
the law to create an efficient and stable stock
market that encourages the establishment of
companies and trade.
 Disclosure and the use of a
Prospectus s 706 - 729
Before 1999 a Public Company had to
provide investors with a document called a
Prospectus for their Initial Public Offering
( IPO).
A Prospectus is a detailed document that
provides all the information necessary for the
investor to make a reasonable decision. Sec
717 contains a Table that sets out a summary
of disclosure procedures -
 When is disclosure required?
S 706 / 707requires disclosure when
offers to issue securities are made.
S 700/716 A defines securities as, shares,
debentures, options and any legal or
equitable rights attached to them.
S 708 indicates kinds of offers that are
exempted from the disclosure rules, ie
offer to professional investors
 Full Prospectus no longer
required in some circumstances
A Full Prospectus is the standard
disclosure document (Sec 710), but it is
time consuming and expensive to prepare.
Since 2000, the legal requirements of
disclosure for small and medium sized
enterprises (SMEs) have been made more
flexible and less onerous so as to reduce
the regulatory burdens on companies.
 Exemptions : Alternative kinds
of Disclosure
Sec 712 allows for a Short Form Prospectus
to be used which gives a summary reference to
more detailed information held by ASIC.
Sec 714/715 allows for an Offer Information
Statement for companies with less than $10
million in capitalisation with the use of a
Profile Statement s 721 is sent out with the
offer documents. ASIC holds a copy of the Full
Prospectus.
 Small scale offerings (sec 708
exemption)
Personal small scale offerings are allowed as an
exemption to the standard disclosure
requirements.
It must be made to interested persons who are
known personally to the offeror or have had
previous business connections.
Offers can be made to a limit of 20 persons in a
12 month period.
The amount raised must not exceed $2 million in
any 12 month period.
A Rights Issue is exempted (
sec 708 AA)
Sec 9 A defines a Rights Issue as an
offer of securities to existing shareholders
in proportion to their existing holdings.
Sec 708 allows companies to raise
additional funds from their existing
shareholders rather than by a public
offering. A Rights Issue is exempt from
the standard disclosure requirements.
 Liability for misstatements or
omissions of information.
The issuing of an offer ( company float) will
usually obtain the technical financial backing
and assistance from an underwriter
usually a Bank, to help determine the type
of security, the price, and the management
and timing of the release to the market.
Sec 728(1) and s 729 - The issuer, the
directors and the underwriters are all liable
to pay compensation for loss or damage
 Defences sec 731 - 733
Sec 731 provides a due diligence
defence to mistakes in a prospectus if the
person had made all reasonable inquiries
and had reasonable grounds for believing
there were no omissions or misleading
statements.
Sec 733(1) provides for a general defence
if the person placed reasonable reliance
on information supplied by someone else.
 The nature of shares - Text
Chp.8
A shareholder acquires a proportional interest
in the net worth of the company (eg. The equity
capital). They do not own the property and
assets of the company. A share is an item of
intangible property known in equity law as a
chose in action giving the holder certain rights.
Shares are bought, sold and transferred
through an electronic system CHESS which
has replaced certificates with SRN.
 The nature of shares
Shares can be fully paid or partly paid. The
amount that is unpaid on partly paid shares is
known as reserve capital which is on call.
Share option is where shares are to be
transferred for consideration at a future date.
A convertible debenture is a loan to a
company that can be converted into shares at
a future date.
 The nature of shares
company register
The transfer of shares is not completed until
the transfer is put on the Companys share
register.
The shareholder becomes a member once
their name is entered on the register.
All companies must also keep a register of
option holders, s 170.
All companies should disclose grants of
options to directors and senior officers.
 Classes of shares
Companies can issue different classes of
shares, for example a small family Pty Ltd Co
may describe in its Constitution that there are
to be Class A shares held by the parents,
Class B shares held by the children and Class
C shares held by employees. If an employee
wants to sell their shares they must be offered
to class B holders. Different shares can have
restrictions and special rights attached.
 Sec 254 gives a Co the power
to issue shares of different kinds
Different classes of shares may allow the
majority to maintain control.
Ordinary Shares have normal voting,
dividend and winding up rights, and pre-
emptive rights to any stock offerings.
Preferential Shares usually have limited
voting rights and winding up rights, BUT
have the benefit of receiving a fixed rate of
return when dividends are paid.
 Preference shareholders are
protected
The creation of different classes of shares with
different rights are an internal matter for the
company and therefore must be clearly set out
in the constitution and company rules, ( sec
254A (2) and 254 G (2) ), which can only be
changed by special resolution of members.
Any variation of minority share holders class
rights must be fair and are protected by sec
246 B.
 Variation of class rights
Before the protections can be applied the
courts have given a narrow ( limited)
interpretation of what constitutes a variation.
It must involve a variation of the strict legal
rights of the particular class, such as voting
rights for directors or rights to a dividend as
set out in the constitution.
A notice of any division or conversion of
shares must be lodged with ASIC in 14 days.
 Definition of a variation in case
law
In Greenhalgh v Arderne Cinemas Ltd [1946]
1 All ER 512, the company subdivided all its
ordinary shares 5 to 1 to rank equally with
shares already held by Greenhalgh thereby
diluting his voting power. The court held it
was NOT a variation.
In White v Bristol Aeroplane Co [1953] Ch
65, an issue of bonus shares to preference
shareholders, was NOT a variation.
 The Statutory procedures for
gaining the consent of the class
Sec 246B(1) If the company constitution and
rules sets out procedures for variation or
cancellation of class rights then those
procedures must be followed.
Sec 246B(2) If the company has no procedures
then a special resolution of the company must
be passed and a special resolution passed by a
meeting of members of the affected class; OR
with the written consent of 75% of the class.
 Protection of fairness for class
rights variations
Sec 246B (3) The company must give
written notice of the variation or cancellation
to the members of the class within 7 days.
Sec 246C certain actions are variations
Sec 246D where all members of a class do
not agree, either by special resolution or
written consent, then members with at least
10% of votes can apply to court within one
month to cancel the variation.
 Sample Test/exam question
Disclosure and the use of a Prospectus is
very important in the issuing of shares for
sale in a public Company. A prospectus
however is a time consuming and
expensive document to prepare and the
Act now allows certain alternatives.
Explain the various alternatives that are
available. (20 marks)
 Sample test/exam question.
Outline the liability of directors for issuing
disclosure and prospectus documents with
false or misleading information, and
explain any defence that might be
available. (10 marks)
 Key points of focus
Outsiders are now protected under statutory
provisions s 131and s 133 if they enter into
contract with a promoter.
Capital fundraising through public share
offerings requires proper disclosure under
the fundraising provisions s 700-s 741
particularly for an IPO:
- the issuing of a Full Prospectus s 710
Alternative documents can be used s 708
 Key Points of Focus continued
The various alternative disclosure documents
that might be used are:
- Short Form Prospectus s 712
- Offer Information Statement s 714/715
- Profile Statement s 721
- Small scale Offerings s 708
Liability for omissions/ misleading info in
disclosure documents s 728/ 729, and
defences s 731 and 733(1).
 Key points of Focus continued
Different kinds of shares ordinary shares and
preferential shares; and the need for different
classes of shares is an internal matter for the Co.
and should be set out in the Company Rules s
254A (2) and G(2).
Minority shareholders must be treated fairly in
relation to any variation of their class rights s 246
sets out protections.
BUT the case law definition of a variation is
very restricted.- Greenhalgh.