Business Law

Lecture Twelve (No tutorial) Tutorial Questions

Question One:

Richie, Fonzie and Ralph form a company called Big Als Pty Ltd to own and operate a fast food franchise business. Each of the founders own 10 shares. The directors of Big Als Pty Ltd are Richie, Joanie and Chachi.

Analyse the following:

1. Richie has used money from the company's bank account to purchase a new car for himself. Joanie has just discovered this and wants to bring an action under section 232. Can she?
2. Assume Joanie and Chachi are the nominee directors of Fonzie and Ralph, respectively. Richie has a fight with Fonzie and Ralph. At a shareholders meeting they pass a resolution voting him off the board. Can Richie assert a cause of action under section 232? What remedy would he be seeking?
3. Ralph has learned that the directors negotiated for the purchase of some land for a new restaurant. Apparently the price negotiated was so good, that the directors formed a new company and purchased the land themselves. Ralph has complained, but the directors just ignore him. He wants the company to sue the directors to get land and/or profit they made on the transaction. Advise Ralph on whether he could peruse a derivative claim against the directors.
4. Fonzie is concerned that the directors are overstating the profits in the company's financial accounts in order to meet their full bonus criteria. Fonzie wants a forensic accountant to review the company's books and records. How should Fonzie proceed?
5. Fonzie has also discovered that the directors want to enter into a transaction to purchase a number of service stations from a company owned by Joanie at above market prices. Fonzie wants to stop this transaction from proceeding. What should he do?

Question Two:

Kestrel Pty Ltd (Kestrel) is a small family company which operates a business breeding kestrels, eagles, falcons and other large birds of prey. Kim, Kourtney and Khloe are all siblings and the only directors of Kestrel and each owns 25 ordinary shares. When the siblings first started the company, they thought

it would be wonderful for them all to be involved in an enterprise where they worked together and had control over their destiny.

Clause 15 of the constitution of Kestrel provides that Kim, Kourtney and Khloe shall be a director of Kestrel at all times.

Late last year Kim had a massive fight with the rest of the family and now Kourtney and Khloe won't speak to her and don't want her to have anything to do with the company.

At a recent board meeting, Kourtney and Khloe passed the following resolution (Kim voted against the resolution):

Kestrel Pty Ltd (ACN 123 456 789) Written resolution

Share Issue

Resolved that:

As Kestrel Pty Ltd requires additional capital to purchase more inventory, Kestrel Pty Ltd shall issue 25 ordinary shares to Kourtney and 25 ordinary shares to Khloe in consideration of $5,000.00 for each share.

Signed: Kourtney (Chairperson)

JANUARY 1, 2014

An extraordinary general meeting was held in February where a special resolution was passed removing Clause 15 of the constitution. Thereafter, a second resolution was passed at the meeting removing Kim as a director.

After removing Kim from the board, Kourtney and Khloe attended a board meeting suspending dividends indefinitely and increasing their directors' salary.

After the February meeting, Kourtney and Khloe realized that they could sell bird droppings to farmers to use as fertilizer and make a lot of money. Kourtney and Khloe registered a new company called BirdFert Pty Ltd ("BirdFert") in which they are the only shareholders and directors. BirdFert collects the droppings from Kestrel at no price (utilizing Kestrel's employees) and sells the droppings to famers at a massive profit.

Kim wants to know if (i) it was legitimate for Kourtney and Khloe to award the new shares to themselves; (ii) she can commence a cause of action in Kestrel's name against Kourtney and Khloe to recover the profit they made from selling the bird droppings; (iii) she has any claims she can commence in HER name for the actions that Kourtney and Khloe have undertaken, and the remedies to which she might be entitled.