BUSL250 INSOLVENCY RESTRUCTURING 1 Insolvency s95A : defines solvency - and a person that is not solvent will be insolvent Insolvent: when a company (person) is unable to pay its debts and as and when they become due and payable. The solvency of a company is determined by considering various matters including: cash flow; resources available; industry specific practice including terms of payment. Common signs of financial trouble are: Low operating profits or cash flow from the main business Trade suppliers refusing to extend further credit to the company Legal action taken, or threatened (tax law, enviromental law, creditors,etc) Market downturn Difficulty meeting loan commitments 2 Insolvency Pursuant to the Corporations Act there are several ways of dealing with insolvent companies: Restructuring 1) Arrangements and Reconstructions 2) Receivership 3) Voluntary Administration Liquidation or Winding up Insolvency is commonly the reason why a company goes into restructuring or liquidation. However, it is possible for a receivership, voluntary administration, scheme of arrangement or winding up to take place even where a company is solvent 3 Arrangements and Reconstructions Schemes of arrangement are used in situations such as: Members' scheme \"friendly\" takeover - reconstructions example : Coles Myer and Westfarmers arrangements are made with shareholders, not creditors Creditors' scheme Insolvency Arrangements are made with creditors Procedural requirements are set out in ss 411 and 412 S411(4) (b) - court approval is required to initiate a scheme and also for an order that a meeting of creditors be convened. a copy of the court order approving the scheme must be lodged with ASIC - s411(10) If a meeting in ordered, the company must send an explanatory statement and other relevant information to those entitled to attend - s412 4 Arrangements and Reconstructions The scheme becomes binding if approved by: Court Majority of creditors holding at least 75% of debt Examples of how a scheme (or in fact any other insolvency arrangement) may work: Moratorium - creditors wait for part or all of debt Compromise - creditors accept part of debt and/or an installment arrangement are adopted Creditors' schemes are rarely used due to: Complex procedural requirements: lengthy documentation separate meetings of various categories or \"classes\" of creditors Court involvement can result in delays and expense Members' schemes will continue to be an relevant tool in effecting the reorganisation or reconstruction of solvent companies 5 Voluntary Administration This is the most popular restructuring mechanism: Quick to implement Efficient process to arrive at outcome (about a month) Not subject to court intervention Aim of VA to give an insolvent company a chance of survival or, if it is not possible at least to maximise the return to its creditors - s435A Who may appoint the administrator? The board of directors - s436A A liquidator or provisional liquidator - s436B A secured party - s436C 6 Voluntary Administration The qualifications and requirements of an administrator: Must be a registered liquidator - s448B Must be independent of the company (s 532) Not owed more than $5000 by the company Not an officer or auditor of the company Requirements for registration as a liquidator in Schedule 2 include: Sufficient experience at a senior level Completion of a course in Commercial law at tertiary level Appropriate insurance cover 7 Voluntary Administration Liability of administrator arising from: breach of general law or statutory duties Administrators are in fiduciary relationship with the company and thereby owe fiduciary duties to the company Pursuant to s 9, an administrator is an \"officer\" of the company and thereby has the duties of officers. contracts entered during administration Administrators are personally liable for certain debts incurred during administration including goods brought, property hired, leased or used by company, or borrowed money - s443A Administrators will also be liable for lease payments (unless gives notice of non-exercise of right with 5 business days of appointment) - s 443B The administrator has a right of indemnity out of the company's property for these amounts - s443D 8 Voluntary Administration Effect of the administration: During the period of administration, there is a moratorium \"freeze\" or \"stay\" - on creditors bringing debt recovery actions, winding up proceedings, and other claims : ss 440A - 440G However, there are exceptions: a secured creditor with a security interest in the whole or a substantial part of the company's property that enforces within the first 13 business day of the administration (decision period - s9) is not bound by the stay - s441A a secured creditor that enforces before the administrator is appointed is not bound by the stay - s441B A secured creditor with security over perishable property is not bound by the stay - s441C 9 Voluntary Administration Powers of the administrator: takes control of the company Can exercise all of the functions that the company or any of its officers could perform - s437A an agent of the company - s437B wide powers of investigation - s438A Limitations on administrators' power: Administrator cannot destroy property rights that arose before administration except where expressly authorised by statute. 10 Voluntary Administration During administration, the company falls under the control of the administrator and as a result the directors ability to exercise their functions and powers, and to enter transactions, is limited Directors may perform company functions only with the administrator's written consent - s198C Transactions entered by directors will be void unless the administrators written consent was first received, or unless entered into pursuant to an order of the court - s437D Directors who breach these provisions may be ordered to pay compensation - s437E 11 Voluntary Administration Schedule of Administration: First meeting in administration: takes place within 8 business day after the commencement of administration - s436E The administrator convenes the meeting by giving written notice to the creditors and by publishing the notice of the meeting in the prescribed manner - s436E (3) At this meeting the creditors appoint a committee of inspection 12 Voluntary Administration Meeting to decide the company's future: To be held within 5 business days before, or within 5 business days after the 20 business day \"convening period\" - s439A The outcome of the meeting is a choice to be made from 3 options (s 439C): * Deed of Company Arrangement - this is the focus of VA and is an arrangement between the company and creditors regarding debts owing - it enables a restructure * Winding up - appointing a liquidator with wide powers of recovery may be an alternative solution for creditors * Administration simply ends without either of these options being chosen 13 Receivership 2 ways receivers are appointed: By court S1323 - grounds of appointment where an investigation is being carried out by ASIC S233 - where a shareholder succeeds in an action for oppression By secured creditors who wish to enforce their security Receivers must be registered liquidators - s418 A receiver is an agent of the company Receivers' powers arise from: S420 The security instrument (or the court order) under which the receiver has been appointed 14 Receivership Receivers' Duties General law and Statutory law Owes duties to the secured creditor who appointed them When appointed by the court a receiver takes on a fiduciary relationship with the company Receiver is an officer for statutory provisions S420A - in relation to the sale of company assets the receiver is under a duty to sell at market value or best price available 15 BUSL250 LIQUIDATION INSOLVENT TRADING 1 Types of Winding Up There are two ways a company may be wound up: 1. Compulsory winding up This is a court-ordered winding up 2 types: a) Winding up in insolvency (ss 459A, 459P) b) Winding up on grounds other than insolvency - for example: oppressive conduct (s461) 2. Voluntary winding up The company initiates this process without recourse to the court 2 types: a) Members' voluntary winding up for a solvent company b) Creditors' voluntary winding up for an insolvent company 2 Voluntary winding up a) Members' voluntary winding up: Initiated by shareholders of the company, who pass a special resolution (75%) to wind up the company - s491 Directors make a written declaration of solvency that the company will be able to pay all debts of the company in full within 12 months after the commencement of winding up - s494 Appoint liquidator by ordinary resolution. Power of directors cease and liquidator takes control - s495 Company files with ASIC a copy of resolution within 7 days and within 21 days of the resolution arranges for notice to be published (ASIC insolvency notices website) - s491 3 Voluntary winding up b) Creditors' voluntary winding up: May arise where directors are unable or unwilling to complete a declaration of solvency Liquidator is appointed by the company in general meeting for purposes of winding up and distribution - s 499 At the meeting to decide the company's future under a voluntary administration (s 439A) the creditors vote to wind the company up - s 439C 4 Compulsory winding up Compulsory winding up in insolvency s95A sets out that a person is solvent if they can pay all their debts as and when they become due and payable. Accordingly, insolvency is when this cannot occur Parties who may apply to the court include: creditors (most common); company; members; ASIC; or a director Where the application is by ASIC, the leave of the court must be sought. Leave of the court will be given where the court is satisfied that there is a prima facie case that the company is in insolvent. - s459P (3) Where the application is by a creditor based on a statutory demand there are 3 elements to be satisfied: 1) 2) 3) the court has jurisdiction Debt > the statutory minimum ($2000 or other prescribed amount) Company is insolvent 5 Compulsory winding up The most common presumption of insolvency is the company failed to comply with a statutory demand. s459C(2) Key elements of \"statutory demand\" are as follows: The demand must be in writing - s459E(2)(d) It must relate to a debt which is due and payable The amount of the debt is at least the \"statutory minimum\" the demand must be refer to the debt, and require payment within the relevant period (in most cases 21 days) - s 459F If the debt was not a judgment debt, the demand must be accompanied by affidavit that verifies that debt is due and payable by the company - s 459E 6 Compulsory winding up Non-compliance with a statutory demand creates a presumption of insolvency A company served with a demand is permitted to apply to the court to set it aside (s 459G). This must be done within 21 days of service The 2 main grounds on which the court may set aside a demand are: 1) that it contains a major defect: s 459J(1) 2) there is a genuine dispute about the existence or amount of debt: s459J and s459H 7 Compulsory winding up Compulsory winding up by the court on grounds other than insolvency (s 461) Oppression of the minority The company has no members ASIC reports that the company should be wound up The court is of the opinion that the company should be wound up The company fails to commence business within one year of formation or suspends operations for a year or more The company passes a special resolution that it be compulsorily wound up by the court 8 Liquidators The Corporations Act (Schedule 2) requires a registered liquidator to have appropriate academic and professional qualifications In certain circumstances (s 532 - for example, an auditor of the company) a person must not seek appointment as a liquidator without leave of the court Liquidator powers include: Locate and take possession of company's assets (s.478); Sell and collect proceeds from assets; Work out what debts are payable by the company, and what valid claim exists against the company; Bring legal proceedings, representing company in legal actions, if necessary Distribute the proceeds of the realized assets. 9 Liquidators - Distribution of funds First, to secured creditors Second, to preferential creditors - s556 - this includes firstly the expenses of recovering property; next, the costs of the application to wind up; next, liquidators fees; next, employee entitlements Third, to general unsecured creditors - s555 The 'pari passu' rule requires an equal and fair distribution of the property of the company among its creditors; if they cannot be paid in full they are paid proportionately - s555 Following the compilation of final accounts the company may be deregistered 10 Liquidators - power to recoup funds Liquidator (on the company's behalf) is able to claim compensation from any director who has breached their fiduciary duties Liquidator can target directors of the company personally where there is insolvent trading (s588G) - the amount owing becomes a debt due to the company by the director Liquidator is able to recover (\"claw back\") assets using the \"voidable transactions\" provisions 11 Voidable Transactions Voidable transaction is a transaction entered into by a company in the period leading up to its winding up. If the liquidator is successful in finding a voidable transaction the court has power to make orders including: An order \"undoing\" the transaction, or An order that money be paid to the company equal to the amount of the voidable transaction - s588FF 12 Voidable Transactions Type of voidable transactions 588FE Need to find insolvency Time Scale (relation back) Unfair Loan No At any time on or before the winding-up began Unreasonable director related transaction No 4 years ending on RBD or after that day but before winding up Transaction to defeat creditors Yes 10 years ending on RBD Related entity transaction: Yes 4 years ending on RBD Uncommercial transaction Yes 2 years ending on RBD Unfair Preference Yes At any time during the 6 months ending on RBD and /or after the day when the winding up began 13 Relation- back day Start of relation-back day (RBD): Compulsory liquidation The day on which the application for the order was filed Voluntary liquidation The day the special resolution to wind up the company was passed Company in administration Date of administration 14 Defences to voidable transactions Protection available for third parties under s588FG. No order which materially prejudices a person's right or interest will be made: (a) if the person received no benefit because of the transaction or (b) if he or she did receive a benefit: It was received in good faith and; When received the person had no reasonable grounds for suspecting that the company was insolvent or would become insolvent and; A reasonable person in the person's circumstances would have had no such grounds for so suspecting 15 Insolvent Trading The proceedings can be brought by either: The liquidator (s 588M) - here the amount is a debt owing to the company - [note that, although not common, in some cases the liquidator may give consent to a creditor to bring proceedings and here the debt is due to the creditor] ASIC - s 588G is both a civil penalty section and a criminal penalty section (where dishonesty is found) Insolvent trading (s.588G): A director may be personally liable for debts incurred by the company if the company is insolvent when the debt occurs or becomes insolvent by incurring the debt and (a) The director suspects, or is aware there are grounds for suspecting, insolvency; or (b) A reasonable person in a like position and in the company's circumstances would suspect, or be aware there are grounds for suspecting, insolvency 16 Insolvent Trading Defences to insolvent trading (s.588H) Director had reasonable grounds to expect, and did expect, solvency Metropolitan Fire Systems v Miller Reliance on a competent and reliable person ASIC v Plymin; Metropolitan Fire Absence of management when the debt was incurred due to illness or other good reason Director took reasonable steps to prevent debt being incurred. 17 Company Constitution Relationship to Outsiders Financing Dividends 1 Trustee Companies Trusts, like companies, are artificial legal creations. A trust arrangement involves a trustee/ trust fund/ beneficiary. A business may be carried on by a company acting as a trustee (trading trust). Directors of trustee companies may incur liability if no indemnity from the trusts assets is permitted (s197). 2 Constitution and Replaceable Rules Companies are artificial entities. They must have rules / limits to govern their relationship with members; and between members Prior to 1998 companies had: Memorandum of Association (external relationships) Articles of Association (internal relationships) 3 Constitution and Replaceable Rules Post 1 July 1998 companies no longer required a Memorandum - the information previously contained can be found in the company's application for registration For a company formed after 1 July 1998 its internal governance rules consist of: The replaceable rules set out in the Corporations Act; or a constitution; or a combination of both Note that companies formed before July 1998 were able to retain their existing constitutional documents 4 Constitution and Replaceable Rules The replaceable rules adopted on registration. The replaceable rules function as the basic rules of internal management or corporate governance. Section 141 of the Corporation Act contains an index to the replaceable rules Pursuant to s 140 the constitution and replaceable rules bind the company, they form a contract enforceable by the members and directors. 5 Constitution and Replaceable Rules S135 (2) sets out that a company constitution can displace or modify a replaceable rule S136 sets out the capacity of a company to : adopt a new constitution: on registration - the members agree in writing after registration - need a special resolution modify or repeal an existing constitution need a special resolution 6 Constitution and Replaceable Rules Amending the constitution: General test for amendment (for the benefit of the company as a whole) Allen v Gold Reefs Expropriation of minority share rights Gambotto v WCP 7 Constitution and Replaceable Rules The principle arising from Gambotto v WCP Ltd: amendment must be for a proper purpose amendment must be fair Amendment must not oppress minority shareholder 8 Company Liability in Contract Indoor Management Rule: Royal British Bank v Turquand Managing directors: the board of directors manage the company and have power to contract (s198A) The board may elect a managing director (s201J and s198C) 9 Company Liability in Contract Actual authority, can be either Express actual authority (in the internal rules or by the board of directors delegating its power) Implied actual authority (appointing someone to a certain position or \"acquiescence\") Freeman and Lockyer v Buckhurst Park Apparent or Ostensible authority Crabtree- Vickers v Australian Direct Mail Pacific Carriers Ltd v BNP Paribas 10 Enforcing Contracts with the Company 1. Contracting through agents Actual authority Apparent or Ostensible authority 2. How companies execute documents: s127 Without a common seal (s127(1)) With a common seal (s127(2)) 11 Enforcing Contracts with the Company The corporations Act creates assumptions in favour of outsiders dealing with the company (s129) The assumptions in s129: 1) 2) 3) 4) 5) 6) 7) the indoor management rule ASIC records holding out officer or agent will properly perform their duties S127 (1) S127 (2) an officer or agent has authority to warrant authenticity of documents 12 Enforcing Contracts with the Company Pursuant to s128, an outsider is entitled to make the assumptions in s129 in relations to dealings with a company. The assumptions in s129 may be made even if the officer or agent of the company acts fraudulently or forges a document (s128(3) However, the assumptions in s129 will not apply if outsider: knew assumptions incorrect, or suspected assumptions incorrect (s128 (4)) Soyfer v Earlmaze Sunburst Property v Agwater 13 Company Liability in Tort and Crime Companies can be liable in tort or crime: Vicarious Liability The company is liable through its employees ABC Development Learning Centre v Wallace Direct or Organic Theory Requires identifying the directing mind and will Tesco Supermarket v Nattrass The Criminal Code Act 14 Company Financing Companies finance their operations through a mix of: Equity Retained profits Reserves Shares (ordinary shares or preference shares) Debt / Borrowings Loans (bank loans, overdraft, mortgage, factoring) Debentures The ratio between debt and equity is called the gearing ratio or leverage ratio (this ratio is an indicator of risk for investors) 15 Comparison of Equity (Shares) and Debt SHARES DEBT Public companies raise capital by offering shares to investors (shareholders) Companies borrow funds from the lenders (creditors) and issue debentures. Shareholders are members of the company with all attendant rights under the Corporations Act. Debentures holders are merely creditors of the company. Their rights depend largely on the terms of the contract. Shareholders are participants in the company enterprise Creditors are not participants in the company. Creditors are outsiders. Creditors' return is interest. Shareholders' return is dividends. However the distribution of profits (dividends) is tied to company performance 16 Comparison of Shares and Debt Share Shares are transferable (s1070A). However, directors of proprietary (Pty) companies can refuse to register a transfer of shares for any reason. (s1072G) Debt Debts are generally not transferable. Pursuant to s563A creditors have a right to be paid before members - payment of a claim owed by a company to a member, whether by way of dividends, profits or otherwise, or any other claim that arises from the buying or holding of shares in the company is to be postponed until all other debts or claims have been satisfied Note: Sons of Gwalia Limited v Margaretic 17 Share Capital Shares are a form of \"securities\" under the Corporations Act. The term \"securities\" is defined in Ch 6D in s761A and includes: Ordinary shares Which provide voting and dividend rights Preference shares Which provide priority of dividends Options This is a right to take up shares in the future 18 Shares - Disclosure Disclosure of a share offer (s706) must be provided to investors unless that an exception applies (s708 and s708AA) There are 4 types of disclosure documents (s709) Prospectus (s710 & s711) Short form prospectus (s712) Profile statement (s714) Offer information statement (s715) 19 Shares - Disclosure A prospectus must contain all information investors and professional advisors would reasonably require s710. Advertising of the offer is restricted (s734) There are penalties for misleading or deceptive statements in disclosure documents (s728) 20 Maintenance of Share Capital In the common law, the rule in Trevor v Whitworth set out that companies must maintain their issued share capital for the benefit of creditors. However, this strict application of the capital maintenance rule has been modified in the Corporations Act. Chapter 2J permits a company to engage in the following transactions: Reduction of share capital Share buy-backs 21 Reduction of Share Capital s256B(1), a company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: is fair and reasonable to the company's shareholder does not prejudice the company's ability to pay creditors, and is approved by the shareholders by resolution. 22 Reduction of Share Capital s257B - Share capital may be legitimately reduced by way of a buy-back. Most requirements for share buy-back are similar to the requirements for share capital reductions. Buy-backs are optional. Shareholders choose whether to participate (sell their shares) in the buyback. 23 Dividends A dividend is a distribution of the company's profits and can only be paid in accordance with s254T A company's solvency is relevant to the payment of a dividend s254U gives the overall authority to the directors to determine the amount, time and method of payment of a dividend. s254U is a replaceable rule. s254V - The debt arises only when dividends have been declared and the time fixed for payment has fallen due. Until that time, a company does not incur a debt and also the dividend can be revoked. 24 Debentures and Loan Capital Debentures are documents that either create or acknowledge an obligation by a company to repay a debt. s283BH describes 3 forms of debenture: Mortgage Debenture A company gives security over real property Debentures Any other type of security arrangement Unsecured note No security given Where debentures are issued to the public a trustee is appointed (s283AA). 25 Secured Finance The Personal Property Securities Act (PPS Act) affects the traditional law regarding securities. The PPS Act covers individuals and companies and relates to security over personal property. A 'security interest' includes traditionally recognised forms of security such as charges as well as nontraditional forms such as retention of title arrangements To be enforceable a 'security interest' must attach to property ('collateral') - giving the secured party legal rights 26 Secured Finance Under the PPS Act a security interest may exist in relation to 2 important types of assets: Non-circulating - here the security interest attaches to a specific, presently identifiable asset (previously this category was called a fixed charge) Circulating - here the security interest attaches to a circulating asset, something which may be disposed of in the normal course of the company's business, such as trading stock (previously this category was called a floating charge). The security agreement will govern default 27 Secured Finance Priority between competing 'security interests' is a relevant issue The right to priority is based on the extent to which the 'security interest' is 'perfected' One way to 'perfect' a 'security interest' is by registration of a financing statement on the PPS Register. A financing statement includes information about the secured party and details of the secured property (collateral) 28 Secured Finance A 'security interest' will not be enforceable in certain situations: If not registered on the PPS Register within the applicable time period and the company goes into liquidation, voluntary administration or executes a deed of company arrangement Where directors seek to enforce within 6 months of the creation of the interest 29 DIRECTORS AND CORPORATE MANGEMENT DIRECTORS FIDUCIARY DUTIES 1 Who is a director? 'Director' is defined in s.9 Corporations Act as follows: a) A person who: 1) Is appointed to the position of a director; or 2) Is appointed to the position of an alternate director and is acting in that capacity b) Unless the contrary intention appears, a person who is not validly appointed is a director if 1) They act in the position of a director ('de facto director') or 2) The directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. ('shadow director') 2 Who is a director? De facto directors (s9 (b) (1)) Need not be officially appointed: The test is whether they were acting in the position of a director May have resigned: The test is whether the tasks they performed were those normally undertaken by director 3 Who is a director? Alternate directors (s.9 (a) (ii)) is a person appointed to act as a \"fill-in\" for a director who for some reason at the time is unable to act as a director. The alternate director is a director only at the time they are called upon to act in the place of the absent director. 4 Types of directors Managing Director appointed pursuant to s201J and may take all the board's powers under s198C Chair of Directors exercise procedural control at meetings (s248E) and signs the minutes (s249U) 5 Types of directors Nominee Directors are often appointed to represent the interests of a particular class or classes of shareholders. example: employees may be entitled, pursuant to the company constitution, to elect a director. a subsidiary's directors may be nominees of the holding company. 6 Types of directors Executive Directors full-time employee of the company and as such owe contractual, common law and statutory obligations to the company. Non-executive Directors not involved in full-time management of the company and not an employee. Often these are experts who can provide specific expertise in relation to certain areas of the company's business 7 Appointment of directors s201A requires: Public company must have at least 3 directors Proprietary company to have at least 1 director Restrictions on appointments: must be an individual and not a company (s201B(1)) must be at least 18 years old (s201B(1)) the person must consent to appointment as a director (s201D) must not be disqualified from being a director (s201B(2)) 8 Appointment of directors When companies are formed, the directors will be those persons named in the application to register the company lodged with ASIC. Post-registration, directors can be appointed by: Shareholders in general meeting (s201G - replaceable rule) In some cases other directors (s201H - replaceable rule) 9 Removal of Directors Directors can be removed by the shareholders in general meeting however Note that in proprietary companies - the replaceable rules or constitution govern removal of directors (s 203C) and accordingly 'entrenchment' of directors is possible (governing director) In public companies - the directors can be removed by shareholder resolution regardless of any provisions in the constitution (s203D) 10 Disqualification from Management Automatic Disqualification (s 206B) Convicted of certain offences Bankruptcy Entering a personal insolvency agreement Period of disqualification is 5 years plus up to a further 15 years 11 Disqualification from Management By court order: Contravention of civil penalty provisions (s 206C) - unlimited disqualification Manage 2 or more failed companies within last 7 years (s 206D) - 20 years (maximum) disqualification Repeated contraventions of the Corporations Act (s 206E) - unlimited disqualification 12 Disqualification from Management By ASIC directly (s 206F) A director of 2 or more companies that have gone into liquidation within last 7 years paying unsecured creditors less than 50% of their debt. Period of disqualification 5 years (maximum) 13 Directors Duties Director's sources: duties arise from 3 main 1) General Law - Fiduciary duties 2) Corporations Act - Statutory duties 3) Company's constitution and replaceable rules 14 Directors' Fiduciary Duties Classification of fiduciary duties: A. Loyalty and Good Faith Duty to act in good faith and in the best interest of the company Duty to use power for a proper purpose Duty to avoid conflicts of interest Duty to retain discretion B. Care and Diligence Duty to act with reasonable care and diligence 15 Directors' Fiduciary Duties Directors owe their fiduciary duties to the company. Breach of fiduciary duty is enforced by company. If the company is in liquidation, it will be the liquidator who has power to bring actions on behalf of the company. ASIC, on the other hand, enforces the statutory duties 16 Directors' Fiduciary Duties Where there is a breach of the fiduciary (general law) duties the company seeks a remedy (an order compensating the company for any loss sustained) Note that where there is a breach of the statutory duties ASIC will seek a penalty (punishment) Remedies for breach: Damages (what the company has lost) An account of profits (what the director has gained) Rescission of a contract Injunction (an order requiring or restraining a certain action) Constructive trust arrangement 17 Who is the company When a company is solvent the directors should be aware of the shareholders interests Parke v Daily News When a company is insolvent the directors should be aware of the creditors interests Kinsela 18 Ratification Ratification is available for general law (fiduciary duties) breaches. When directors breach their fiduciary duties, the company (via a shareholders general meeting ) may ratify (approve or forgive) the directors. Limitations in shareholders ability to ratify: Ratification is not possible if the company is insolvent Kinsela v Russell Kinsela Pty Ltd When the company is insolvent the creditors are at risk 19 Ratification Ratification will not valid if there is a fraud on the minority shareholders Cook v Deeks Ratification is not available when there is a breach of statutory duties Angus Law Services Pty Ltd v Carabelas: \"The Corporations Act is federal law enforced by ASIC. Thus the shareholders meeting can't ratify the directors\" Ratification is not available when a director acted fraudulently or dishonestly 20 Duty to act in good faith To act in good faith means the director must genuinely believe that they are acting for, and in the best of interest of the shareholders as a whole (the company). However, the duty requiring directors to act in good faith duty also has an objective element. What the director considers as in the best of interest of the company may not be what the court considers to be so ( Advance Bank v FAI Insurance Ltd) It is necessary to consider what a rational director would consider to be in the best interests of the company 21 Cook v Deeks 3 of 4 director/shareholders formed a new company and arranged for the business of the first company to be transferred to the new company They breached their duties to the first company and their attempt to ratify the conduct in breach (as majority shareholders) failed The Court made an order compensating the loss to the first company by imposing a trust arrangement the 3 directors holding the benefit of their breach (the business transferred to the new company) on trust for the first company 22 Duty to act for a proper purpose Directors have extensive powers to run the company, however where they use such power to prejudice groups of shareholders or to secure their own positions they may breach their duty Howard Smith v Ampol - destroy existing majority [2 major shareholders controlled 55% of the shares - bid for further shares and control of the company - directors issued new shares to frustrate bid - the 2 shareholders now reduced to minority interest] Ngurli v McCann - act in self-interest 23 Duty to avoid a conflict of interest Directors fiduciary duties require them to act in the company interests at all times Furs v Tomkies - it will be a breach of duty where directors conduct secret negotiations to the company's detriment Where opportunities arise in the normal course of directors carrying out their role (corporate opportunity) they should not seek to benefit personally, or take the matter further, unless they have disclosed relevant matters to the board Disclosure is essential - Qld Mines v Hudson; and see s 191 24 BUSL250 Takeovers Financial Services and Markets 1 Takeovers Takeovers are about control. A takeover occurs when a company (the bidder) seeks to gain control over another company (the target) by acquiring its shares. Control the board (ordinary resolution) - more than 50% Control the constitution (special resolution) - 75% Total control (tax, admin, etc) - wholly owned (100%) Central in takeover law is the concept of \"relevant interest\" - s608 Hold the securities Have power to exercise Have power to vote Have power to dispose of the securities 2 Restrictions on takeovers Corporations Law - s606 - 20% threshold prohibitions on acquisition to ensure fairness to target shareholders. Unless an exemption applies a person must not acquire a relevant interest in voting shares above the threshold limit of 20% of the issued capital Unless an exemption applies a person must not acquire a relevant interest in voting shares which increases a person's holding to any percentage between 20% to 90% the prohibitions in s606 do not apply if a person has relevant interest in at least 90% of the voting shares the threshold is based on relevant interest, not based on ownership. 3 Compulsory Acquisitions s661A - Compulsory Acquisition or Disposal Where a bidder (including associates) has a total relevant interest in at least 90% of the voting shares and at least 75% of the bid is accepted, then a compulsory buy out of the remaining target shareholders is possible. s662A - minority shareholder not be \"locked in\" Where a bidder (including associates) ) has a total relevant interest in at least 90% of the voting shares they must offer to buy out the remaining holders of shares. s664A and s664AA - 6 months rule Where a person has a full beneficial interest (voting power and value) in at least 90% of the shares in a company they may compulsorily buy out the remaining shares within six months of acquiring that threshold. 4 Acquisitions Beyond Threshold s602 : Excludes from the prohibition in s 606 the acquisition of control in an unlisted company with less than 50 members s611 - acquisitions exempt from the s606 prohibitions an acquisition under a will or by operation of law an acquisition that results from an initial public offering (IPO) Creeping takeover (s611 item 9) a bidder is allowed to acquire up to 3% every 6 months if they hold 19% of the company's shares for a continuous period of 6 months or more. Permitted means of acquisitions (s611 item 1) These will relate to hostile takeovers - and include market, and offmarket bids 5 Permitted means of acquisition Off - market Bid Market Bid procedure outlined in s634 and s635 listed securities only - takes place on ASX must be full bid (buy all securities in the bid class) consideration must be cash only procedure outlined in s632 and s633 listed and unlisted securities either full bid or partial bid consideration can be: Cash or Securities or Combination of cash and securities Most popular and most common due to flexibility 6 Takeover Procedure Bidder's statement Content requirements in s636 the identity of the bidder terms of bid details of bidder's intention including: matters in relation to the continuation of the business of the target any major changes to be made to the business. plans for the future employment of the present employees of the target Various reports included in bidders statement from experts or others must be accompanied by a statement indicating the persons consent to the use of the information Lodged with ASIC. However, ASIC takes no responsibility for its content 7 Takeover Procedure Targets statement Main purpose is to inform targets shareholders Content requirements in s638 Directors recommendations Must include all information that shareholder and their advisers would reasonably require to make an informed assessment whether to accept the offer under the bid Directors of a target company who do not make recommendation in the targets statement must give reasons as to why a recommendation is not made. s640 requires that an expert's report accompany the target's statement if: the bidder is connected with the target; or the bidder is already entitled to not less than 30% of the target's shares The expert must report on whether the takeover offer is \"fair and reasonable\" 8 s670A s670A specifically focuses upon takeover situations and prohibits misleading and deceptive statements in takeover documentation. S670A imposes criminal and civil liability on certain people for false or misleading material in documents and statements issued in relation to takeover bids. Those who may be exposed to the liability during the takeover: Directors if they prefer their own interest Experts who provide reports containing material omissions 9 Takeovers Panel Set up under the ASIC Act Deals with takeover disputes arising during the bid period Applications to the Panel may be made by bidders, targets, ASIC or any other affected party The Panel has the power to make declarations of unacceptable circumstances and as a result it can make orders to protect the rights of interested parties, or orders as to the manner in which the takeover proceeds The constitutional position of the Takeovers Panel has come under scrutiny in a number of cases however its ability to make declarations has been confirmed Glencore International v Takeovers Panel Australian Pipeline Limited v Alinta Ltd 10 Financial Services and Markets The regulatory scheme in Chapter 7 Corporations Act applies to: Financial products (securities, managed investments and derivatives); financial investments; financial services; financial risk; financial markets Financial service providers must: Hold a licence - s 911 Comply with disclosure and other obligations; and Not engage in prohibited conduct Section 912A sets out general obligations which include efficiency, honesty and fairness; competence; absence of conflicts of interest; dispute resolution systems for retail clients; risk management 11 Regulating Market Conduct The following conduct is prohibited: Short Selling (s1020B) Selling securities or other financial products not yet owned or possessed For example short-sellers sell securities at current price, in the anticipation that the price will fall and they will be able to buy in at lower price To avoid breaching s 1020B the seller must have an exercisable and unconditional right to vest the securities in the buyer Breach of s1020B is an offence (s1311) Market Manipulation (s1041A) Creating an artificial price for trading in financial products on a financial market False Trading and Market Rigging (s1041B) Engaging in misleading or deceptive conduct (s1041H) 12 Insider Trading Elements of insider trading (s1043A) occurs when a person: Possesses price sensitive information that is not generally available but if it were generally available, the information would be likely to have a material effect on price and the person: Trades in the share - Trading Offence Procures someone else to trade in the shares - Procuring Offence Gives the information to someone will likely to trade in the share or procure someone else - Tipping Offence Information (s1042A) - widely defined Information will be generally available where it is readily observable (s1042C) Information may be readily observable even if no one observed it 13 Insider Trading Civil and criminal penalty provisions apply to insider trading and the court may order that the insider compensate persons who have suffered damage as the result of the prohibited conduct R v Rivkin The issue was: did Rivkin have information regarding the securities that was not generally available but if it were generally available would have had a material effect on the price of the securities There are exceptions to the insider trading provisions such as 'Chinese walls' where information access is kept separated in large businesses; and there are defences such as establishing that the information was generally available 14