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BAFI5205C Apply legal principles in corporations and trusts law National Code FNSTPB501A Written Assignment for Semester 2 2015 This assessment is a series of case studies (covering the topics listed below) where you will need to provide advice to business clients by answering ALL questions. The written assignment is to be completed individually and submitted online via Blackboard by Wednesday 21st October 2015 5.00pm. Assessment Task Assessment topics: Choosing a Business Structure The Company - A Separate Legal Entity: Nature, Regulation and Registration Management Directors' Duties Share Capital and Fundraising External Administration of Companies Associations Trusts Elements and Performance criteria: 1.1 Research corporation and trusts law and related legislation, regulation and practice. 1.2 Identify different types of corporations and trust law transactions and clearly outline their legal context, establishment procedures and purpose. 1.3 Identify relevant legal principles applying to corporations and trusts matters. 2.1 Identify areas of risk in the application of law in corporations and trusts matters. 2.2 Analyse how legal issues can impact on different types of business structures. 2.3 Evaluate the relevance and implication of risks for the structure, operation and performance of different types of business structures. 2.4 Assess the ways in which risk mitigation is addressed in the formation and operation of different types of business structures. 3.1 Collect and collate available information for analysis. 3.2 Interpret, analyse and process available information to obtain required knowledge. 3.3 Seek advice and guidance of specialist expertise where required to interpret, analyse and synthesise. 3.4 Provide advice based upon identified facts and relevant law. 4.1 Relevant legal sources are reviewed regularly and any changes applied in daily 4.2 Systems for keeping up with changes and maintaining up-to-date knowledge about relevant aspects of commercial and property law are put in place and used Resources allowed: Open book - notes, handouts, study guides, text books, websites Instructions: This assessment is unsupervised. Read the questions carefully, plan your answers and answer what the question actually asks. Be thorough. Address all relevant issues in each question. Remember to include specific references to the provisions of legislation and cases upon which you are relying to explain and support your conclusions. You must always correctly acknowledge any sources to which you have referred. ASSIGNMENT QUESTIONS You have recently been employed by GroWealth Accountants and Business Advisors (the firm). In the course of your employment you are asked to assist in gathering and applying information to provide advice to accounting and business clients. Question One George Banks, an architect and interior designer is married to Winifred. They have two adult children, Jane 21 and Michael 19. George is discontent with his present employer and wishes to start his own architecture and interior design business. Winifred, already a partner in her own accountancy practice is happy to give George financial and emotional support in the proposed business, but does not have the time or inclination to take any active involvement in the business. Jane is keen to work full time in the business in an administrative and marketing capacity, but Michael, who is studying engineering, can only help in university vacations. George seeks the firm's advice on whether he should set the business up as either a partnership or a proprietary limited company. In making and explaining your decision you should address all matters you consider relevant including the following: (a) The possibility of involvement in the business of any or all of the family members; Answers: Partnership structure (b) The minimum number of people required to establish the business structure; Answer: Particularly in this scenario is family business, where an individual may enter into partnership with their spouse and children. In the law, there are normally between 2 and twenty persons in a partnership. (c) The elements required for the creation of the business structure; and Answer: For a partnership to exist all three of the following elements must be in place: A commercial relationship exists between persons; A common business is conducted by those persons; The business is conducted to make a profit. (d) Liability for the debts of the business should it fail. Answer: A person entering into a partnership is only liable for debts or eligible for profits from the date of entry. A partnership has no separate entity from that of the partner. That means legal liability falls entirely on the partners and is unlimited in most cases. Question Two Albert is an experienced pastry chef. He is interested in starting and running his own business but is aware of the risks. Albert is now considering purchasing a dessert franchise, 'Decadent Delights'. He seeks the firm's advice on the following matters. (a) How does purchasing a franchise differ from simply starting up your own business? Include in your answer the possible advantages and disadvantages to the franchisee. In a franchise business, the franchisor provides a developed way of doing business, ongoing guidance, systems and assistance in return for periodic payment of fees and/or purchases. Buying a franchise can be a practical alternative to starting your own business. Advantage Potential franchisees can have a clear idea of the potential success of their business based on the history and track record of established franchisees. Small business can compete with national and international businesses Franchisors can provide franchises with management support and on going business, training and technical assistance Participation in collective or group marketing and advertising Financial institutions may be more inclined to extend finance to purchase a franchise Disadvantage Being locked into binding agreement with control of the business held by the franchisor, franchisees may find this very restrictive. Business downturn Misrepresentation or inadequate assistance from the franchisor Franchisors may charge excessive prices for good required. (b) What information must be provided to a franchisee before the making of the franchise agreement and during the life of the franchise agreement? Answer: The codes states that prior to entry into franchise agreement the franchisor must provide the following to the franchisee Extensive disclosure of detailed financial, commercial and personal matters relating to the franchise, the franchisor, their history and the subject territory. This document must be received at least 14 days before the franchisee enters or renews a contract or pays a non-refundable deposit Details of all matters to do with the proposed agreement Seven day cooling-off period Proof of independent advice or proof of waiver of independent advice During the life of the franchise agreement Free association of franchisees Mandatory mediation of disputes Mandatory notification by the franchisors of any litigation it faces, or changes in ownership of franchise If franchisees contribute to marketing funds, these marketing programs must be audited If a franchisor wishes to terminate a franchise they must give reasonable notice A franchisor cannot refuse to approve the transfer of a franchisee's interest to another person without reasonable grounds. Question Three Mary and Burt are partners in 'Parasol Ventures', a business which manufactures umbrellas. The business is growing and Mary and Burt wish to obtain further capital for expansion, begin exporting their products and also reward 6 long-serving and skilled employees who are vital to the success of their business. They have decided to change their business structure to a proprietary limited company and request your advice as to the following matters: (a) How is a proprietary limited company created? A proprietary company must be either a company limited by shares or an unlimited company that has a share capital. It must have a minimum of one and a maximum of fifty non-employee shareholders and a minimum of one director. (b) What information must be provided and to whom? The registration process involves the lodgement of an Application to Register, which is submitted to ASIC. - Directors, secretaries and members are immediately appointed upon the company's registration. - The company is also allocated an ACN or Australian Company Number which must appear on every public document. (c) Does the company's registered office have to be the main place of business of the company? Give reasons for your answer. A company must have a registered office where correspondence can be sent. A registered office does not need to be the same as the company's principal place of business .If the company does not occupy the premises, the occupier of the address must give written consent to the company to use the address as its registered office (d) Can the business continue to be called 'Parasol Ventures'? If not, what changes must be made and why? No, Because It will change the business structure into proprietary limited company. Therefore Parasol Ventures will havethe word proprietary or the abbreviation 'Pty' in its name and must also show the liability of its members unless the member liability is unlimited (e) What does it mean to 'purchase a shelf company'? When a client came along wanting a company, the provider would take one of the provider's shelf companies 'off the shelf' and sell it to the purchasing client. This would involve the shelf company provider transferring the shares in the shelf company to the purchaser or his or her nominees. It would also involve the shelf company's original directors resigning and new directors being appointed (these new directors would be as nominated by the purchaser/client). Also, the name of the shelf company would often be changed to a company name chosen by the purchaser. (f) Is an 'A.C.N' and a 'corporate key' the same thing? Give reasons for your answer. Yes, ACN stands for Australian Companies Number which is the corporate key to the company's registered office address. It has eight digit numbers. This is used to view company records, lodge forms and receive annual statements online. (g) How will decisions about internal governance of the company be made? Replaceable Rules or Constitutions Before an application to register a company may be lodged, decisions must be made as to how the company will be internally governed, Either by replaceable RULES, ITS OWN CONSTITUTIONS or a combination of both. A proprietary company cannot be governed by replaceable rules if a single person is to be its only director and member - special rules apply instead. A table of replaceable rules can be found in the Corporations Act, s141. The following table indicates the subject of the rule and the relevant section of the Corporations Act that covers each rule. The content of each of those sections in the Corporations Act applies as the replaceable rule. Under s135(1), replaceable rules do not apply to a proprietary company while the same person is both its sole director and sole shareholder. A company may include in its constitution (by reference or otherwise) a replaceable rule that does not otherwise apply to it. Also, a provision of a section or subsection that applies to a company as a replaceable rule can be displaced or modified by the company's constitution. The following companies must be governed by a constitution: - public companies 'Limited by Guarantee' who are applying to omit the word Limited from their name under section 150; - 'No Liability' public companies under s112; - 'special purpose companies' that want to obtain the reduced annual review fee under item 103 of the Corporations (Review Fees) Regulations 2003. The Constitution for most companies is drawn up prior to the registration of the company. The Constitution has the effect of a contract between: the company and each member; the company and each director; the company and the company secretary; a member and each other member. A company must provide an up-to-date copy of the Constitution (s139) to any member who requests it within 7 days (or within 7 days of the fee being paid if a fee up to the prescribed amount set out in the Corporations Regulations 2001 (the Regulations) (reg 1.1.01), is charged). It is not necessary to lodge the Constitution of a proprietary company (not being an unlimited company) with the application for registration but they must be kept with the company's records and made available if required. (h) What registers and minutes must the company keep? The company must keep: - Registers of members - Registers of option holders Minutes of general meetings Minutes of meeting of directors Register of charges created by the company over company property under the personal property securities Act 2009 Financial records that enable an assessment of the company's financial position and performance and are sufficient for financial statements to be prepared ( and audited if necessary) for at least seven years after the transactions are completed (i) Mary and Burt had unlimited personal liability for the debts of the partnership. Will they also have unlimited personal liability for the debts of the company? Give reasons for your answer. Generally speaking, if you comply with all of your legal obligations as a director External Site of a company, the company will be responsible for meeting the debts or other liabilities of the company, not you personally. This means debts or liabilities of the company will be paid by the company, not you as a director. However, there are some exceptions so please read the information below carefully to ensure you fully understand your potential liabilities as a director. (j) How may Mary and Burt use the structure of a proprietary limited company to reward employees and encourage them to remain with the business? (k) How may Mary and Burt use the structure of a proprietary limited company to raise capital to grow the business? (l) Why is a company structure beneficial for a business involved in export? Benefits of taking your business exporting Expands your business and spreads your risks; Reduces dependence on the local market; Uses excess production capacity; Buffers against seasonal demand; and Broadens your skill base, management practices, marketing techniques, and ways of competing. Question Four Katy is an established client who has recently inherited a share portfolio in various companies from her grandmother. Katy has not owned shares before and wants advice from the firm on the following matters: (a) Katy is now the owner of 25% of the ordinary shares issued by Cherrytree Ltd, a public company listed on the ASX. Does this give Katy the right to make management decisions for the company? Give reasons for your answer. (b) What is the difference between a 'defacto director' and a 'shadow director', and between an 'executive director' and a 'non-executive' director? (c) How is a person appointed to be a director of a public company? (d) Does the chairman of the board have greater responsibility than other board members? Give reasons for your answer. (e) Do all the directors have to be present in the same room for a quorum to exist at a meeting of a board of directors? (f) How are directors' resolutions passed at a meeting of a board of directors? (g) Katy has received notice of a general meeting of the members of Cherrytree Ltd which has been called to consider a resolution to remove 2 of the directors of the board, Ellen and James. The board itself opposes the resolution. What process is required for the resolution to remove the directors to be successful? (h) Under what circumstances may there be a calling of a members' meeting by directors? (i) What is the process required for Cherrytree Ltd to hold an Annual General Meeting? Does Cherrytree Ltd have to hold an Annual General Meeting? Give reasons for your answer. (j) How does voting at a members' meeting take place? Question Five Grace is an entrepreneurial aeronautical engineer who has grown her business into the publicly listed company, Ideas Made Real Ltd (the company). Grace has recently become the new chairman of the board. The board is composed of 8 non-executive directors and Will, the managing director. Grace has been reviewing some of Will's previous decisions, and is concerned that she may have to obtain legal advice. (a) Explain the meaning of 'material personal interest' and how it affects the voting powers of directors in a public company. (b) What is the purpose of the 'business judgement rule'? What conduct may exclude a director from relying on the 'business judgement rule'? (c) One year ago, Will as managing director of the company, entered into a contract with Beyond Jets Pty Ltd (Beyond Jets) to provide them with 30 pilot consoles for $2 million. The order has been manufactured and delivered to Beyond Jets but no payment has been received. Grace has now discovered that it was very clear at the time the contract was entered into that Beyond Jets was in financial difficulties and was known in the engineering industry to be a bad credit risk. She has also discovered that Will knew this, but wanted to help Beyond Jets trade out of trouble, as Jack, the managing director of Beyond Jets is his cousin. Beyond Jets is now in liquidation and the company is still owed $2 million. (i) Has Will properly fulfilled his duties as a director of Ideas Made Real Ltd? Give reasons for your answer. If not, what duties has he breached and what are the possible consequences of his conduct? (ii) Has Jack properly fulfilled his duties as a director of Beyond Jets Ltd? Give reasons for your answer. If not, what duties has he breached and what are the possible consequences of his conduct. (d) The board of the company and the board of Aerosplat Ltd have been negotiating a merger of the two companies in strict commercial confidence. Will has told his wife and adult children that they should buy shares in Aerosplat Ltd immediately, so they can be sold for a higher price in the merger. Will does not buy any shares himself. Six months later the merger has occurred between and Will's wife and children have made a profit of $50 000 each. Has Will properly fulfilled his duties as a director of Ideas Made Real Ltd? Give reasons for your answer. If not, what duties has he breached and what are the possible consequences of his conduct? Question Six Katy has been further researching her share portfolio and has the following further questions: (a) Why is there a general prohibition on a company buying its own shares? (b) When does a 'rights issue' take place? (c) What are cumulative preference shares? (d) When dealing with options, what is the meaning of the following terms? 'time value' 'strike price' 'in the money' (e) What is a dividend re-investment plan? (f) Is it lawful to vary or cancel class rights to benefit some members at the expense of others by increasing the rights attaching to some shares but not others? (g) What is the meaning of the 10/12 limit? (h) In the case of an issue of shares for a publicly listed company there must be a prospectus. Why? What must it contain? (i) What is 'stop order' issued by ASIC under s739(1) of the Act? (j) What is a 'Professional Investor Exemption'? Question Seven A partner at the firm has asked you to research and provide answers on the following matters: (a) Bob is a builder who operates his business as a sole trader. He undertook work for Abode Homes Pty Ltd 10 months ago for which he has not been paid the $80 000 he is owed. He has filed an action in court against Abode Homes Pty Ltd but has now been told the company is in receivership. Explain to Bob what this means and how it may affect his claim for payment. (b) What is a 'deed of company arrangement'? When does it occur? (c) When does a 'deed of company arrangement' come to an end? (d) How may consumers or members of the public obtain information about companies under external administration? (e) Who can make an application for a company to undergo compulsory winding up because of insolvency? What steps must be followed? Question Eight Rebecca is a very successful jeweller who operates under the label Snazzy Fox. Rebecca is married with three teenage children. Her husband is not currently working but has returned to university to complete his PHD. Rebecca is considering setting up a trust and wants answers to the following questions. (a) What is the meaning of the term 'dual ownership' in relation to a trust? (b) What is an 'express' trust and what is the most common reasons for their creation? (c) What is a 'discretionary' trust? (d) Explain the 'three certainties' which are needed for a trust to exist. (e) What would be the most beneficial type of trust and trustee for Rebecca's situation? (f) What are the main duties of a trustee