Digital Optometry Pty Ltd ("DO") was registered on 30 November 2018 by Max and Lucy, who are also DO's directors. DO does not have a constitution. Lucy was issued 500 "A" class ordinary shares and Max was issued 500 "A" class ordinary shares with an issue price of $1.00 per share (fully paid). DO is developing an online platform (Web version and App) which matches website users to an optometrist in their area, based on a list of demographic questions to be completed by the user. Users can then book an appointment online with the selected optometrist. Optometrists pay a fee to be on the platform and a fee for each appointment booked on the platform. Although not documented, it was agreed that Lucy would be responsible for managing the IT team employed by DO to develop the online platform, and Max would be responsible for managing DO's finances and raising capital. DO raised seed capital of $100,000 from Malcolm, a family friend of Lucy, and Malcolm was issued 150 fully paid "A" class ordinary shares. Max had great difficulty raising capital.

Max was responsible for raising just $25,000 from one investorCassiewho was issued 50 fully paid "A" class ordinary shares. In fact, Max was spending less time on DO throughout 2019, much to Lucy's annoyance. DO was also running out of money to pay for the staff developing the platform. Lucy had to terminate all but one of DO's employees. By June 2019, DO was in serious financial trouble, with a PAYG tax debt of $15,000 due to the ATO on 28 July 2019, current liabilities of $5,000, and $2,000 in DO's cash at bank. DO's only other major asset, the platform (or intellectual property), had no value as it was incomplete. DO needed an injection of capital to pay impending debts, complete the project and release the platform to the market. The platform could generate revenue which in turn would encourage further investment in DO.

Lucy was prepared to lend DO money to complete the platform, but Max refused to do so. Lucy did not want Max involved with Digital Optometry anymore. Accordingly, Lucy made the following proposal to Max at a Board of Directors meeting of DO on 15 June 2019:

Lucy to provide an unsecured interest free loan of $30,000 to DO, with no repayment of the principal required for five years.

Max's 500 shares to be cancelled and Max to resign as a director

As consideration for the cancellation of Max's shares, DO to pay Max $50,000 on or before 30 June 2020 and Max to take security over the online platform. Failure to make the payment by the due date would mean that Max can seize the online platform and sell it to pay the $50,000 debt.

Max reluctantly agrees to the proposal, but Cassie objects to the proposal, alleging that Lucy is being unethical by "forcing Max out of the company". The Board of DO seeks your advice on 15 June 2019. Advise digital optometry as to whether the proposed share cancellation would comply with the Corporations Act 2001 (Cth), and the steps DO would need to take to cancel Max's shares. Using the ILAC method, explain your answer with references to relevant sections of the Corporations Act and case law.

Tips:

1. The cancellation of Max's shares can only be 1 of the 2 share transactions we covered in Week 4 - Variation or Cancellation of Class RightsorShare Capital Reduction

2. Remember a share is a bundle of rights. Cancellinga right means taking away a right ofall shareholdersin a particular class of shares. Varying a right means changing the right ofall shareholdersin a particular class of shares in some way (e.g. increasing or decreasing voting rights - the shareholder still has the right, but it has changed in some way)

3. A variation or cancellation under section 246B has toaffect allshareholders of the class. How many shareholders are in the same class of shares as Max? Does the cancellation of Max's shares remove (cancel) or change (vary) the rights of all shareholders of that class or does the cancellation only impact Max?

4. What is the effect of the cancellation of Max's shares on the share capital of DO?

5. If you are having trouble with understanding the question or explaining your answer, use diagrams-figures-tables etc. For example, students may wish to demonstrate to the reader the results of voting on a share transaction